VW is to buy a 19.9-percent stake in Suzuki by January 2010, and Suzuki would also acquire a stake in Europe's biggest carmaker, a joint statement said.
According to Suzuki, the stake is worth about ¥222.5 billion (€1.72 billion) and the Japanese firm "intends to invest up to one half of the amount received from Volkswagen into shares of Volkswagen."
The two groups said they had "reached a common understanding to establish a close long-term strategic partnership" and a joint press conference was scheduled in Tokyo.
"The alliance may accelerate a reshuffle of grouping of the industry. The global auto industry is now facing a turning point," said auto analyst Tatsuya Mizuno at Mizuno Credit Advisory.
The alliance could create a broad sales network in Asia since Volkswagen already has a strong presence in China, while Suzuki is a big player in India, the Japanese daily Yomiuri Shimbun noted.
"In terms of product portfolio, global distribution and manufacturing capacities, Volkswagen and Suzuki ideally complement each other," the statement said.
VW has just bought 49.9 percent of the German luxury sports car maker Porsche and will acquire all of that company by 2011, making Porsche its 10th brand.
The head of VW's supervisory board, Ferdinand Piech, has said he sees VW eventually owning 12 brands.
Commenting on the alliance with Suzuki however, the statement said "both companies will establish a cooperative relationship while respecting each other's independence as a stand-alone entity."
"The companies plan a joint approach to the growing worldwide demand for more environmentally friendly vehicles," it added.
Mizuno said that "after ending its alliance with GM, Suzuki needed to find a strong partner in order to survive tough competition in the global market." The deal is therefore "really meaningful for Suzuki," he added.
"The global auto industry was weathering the crisis and is now entering into a new stage," Mizuno said.
The management of both firms said their complementary strengths make for a "perfect fit" that will rise to the challenge of the global car market.
Investors cheered the news, as VW shares gained 2.14 percent to €80.58 in morning trading on the Frankfurt stock exchange. The DAX index of German blue-chips was 0.40 percent lower overall.