France's number two carmaker convened a meeting of its board of directors in Paris to "decide on a new partnership with Daimler," French Industry Minister Christian Estrosi told a news conference.
According to reports, Renault and Daimler, the manufacturer of the luxury Mercedes-Benz brand, have reached a deal to take three percent stakes in each other and work together to develop small cars and engines.
Japanese automaker Nissan, which is 44.3 percent owned by Renault, will also reportedly take part in the new tie-up and a formal announcement was expected on Wednesday.
A Renault spokesman refused to confirm the plan.
The global auto sector is struggling to overcome a slump caused by the economic downturn and is joining forces to share technology and reduce costs.
German industry experts think that, by cooperating with Renault, Daimler could make savings of €600 million in its development sector.
Estrosi said a senior official from the economy ministry, Luc Rousseau, was attending the meeting. The French state has a 15-percent stake in Renault.
"I can confirm that we approve of this partnership and that our representative will defend the state's industrial strategy," said Estrosi.
Renault shares were up 2.55 percent at €36.40 in lunchtime trading Tuesday in Paris on news of the partnership with Daimler. Daimler was up 0.27 percent at €35.50 in Frankfurt.
The deal would be a "win-win situation" for the two firms, said Philippe Barrier from Societe Generale Cross Asset Research.
It would allow Daimler to buy technology at good prices while Renault and Nissan could share the cost of research and development for bigger models with the German partner, said Barrier in a research note.
The agreement provides for exchanges of engines and technology, sharing car parts and production platforms for future Smart models, and developing electric cars, said Guillaume Angue, analyst with CM-CIC Securities.
Despite poor sales for its Smart brand of minicars, Daimler envisions a turnaround by sharing parts with automakers that have strength in small vehicles, Japan's Nikkei business daily reported.
Renault and Nissan are developing an extensive line of zero-emission electric vehicles, including Nissan's Leaf, while Daimler could contribute its robust diesel engines for luxury cars and trucks.
Renault, maker of the popular Clio mini-car, entered into an alliance with Nissan 11 years ago to share car parts and open up access to production sites worldwide.
Nissan for instance builds Renault Sandero hatchbacks at its plant in South Africa while Renault builds Nissan models in Brazil. The two carmakers have built a joint plant in India.
Renault, Nissan and Daimler had combined sales of 7.22 million vehicles in 2009, trailing the 8.6 million units for the alliance between Volkswagen and Japan's Suzuki and the 7.81 million vehicles sold by Toyota.
Volkswagen, the biggest European car maker, and Suzuki finalised a cross-shareholding operation last year.