Germany's Volkswagen (VW) is to buy a 20% stake in Japan's Suzuki Motor for 222.5bn yen ($2.5bn; £1.5bn).

Suzuki said it would acquire a stake in VW in return, spending "up to one half" of the funds it receives on VW shares.

In a joint statement the two carmakers said that they had "reached a common understanding to establish a close long-term strategic partnership".

Analysts said VW was keen to utilise Suzuki's expertise in making small, fuel efficient cars.

ANALYSIS By Jorn Madslien, Business reporter, BBC News News that Volkswagen is buying a minority stake in the Japanese carmaker Suzuki is widely seen as the first step towards an all-out merger. The German motor industry giant's wants to become the world's largest carmaker by 2018, ahead of current leaders Toyota and General Motors. Between them, the two sold about 800,000 more cars than Toyota during the first half of this year. But to cement such a leading position, Volkswagen must build strong positions in the world's fastest growing markets. Volkswagen is already strong in China, whilst Suzuki is a powerful player in India through its controlling stake in Maruti Suzuki. Volkswagen eyes global dominance

VW, Europe's largest carmaker, is due to buy its stake in Suzuki by February.

Financial help

"Two of the world's leading carmakers are joining forces and preparing to meet the growing challenges that lie ahead," said VW chief executive Martin Winterkorn.

"Together we can maximise our opportunities for growth."

An alliance between the two carmakers would sell more cars than Toyota, the world's largest carmaker.

During the January to June period this year, Volkswagen's and Suzuki's combined sales reached 4.4 million sales, well ahead of Toyota's 3.6 million cars sold.

Car industry analyst Chizuko Satsukawa, of Standard & Poor's, said the deal would give Suzuki welcome access to investment funds.

"Financially speaking, it's helpful for Suzuki to have a partner to invest in future technologies," said Mr Satsukawa.

Last month, Suzuki tripled its forecast for full-year operating profits.

Original Location: http://news.bbc.co.uk/2/hi/business/8402984.stm