PSA Peugeot Citroen has confirmed that it is in talks with Mitsubishi about a "strategic partnership".
"PSA confirms having started discussions with Mitsubishi Motors Corporation to study jointly possible ways to enlarge our relations which could go as far as a strategic partnership," it said in a brief French-language statement.
Nikkei English News reported that the companies are now in talks about an agreement that would give Paris-based Peugeot a stake of 30% to 50% in Mitsubishi, although it did not source its claim.
Mitsubishi Motors, which posted a first-half net loss of just over 400 million dollars, said earlier on Thursday it was in talks with Peugeot on enhanced cooperation.
It is already partnering PSA's electric vehicle projects, which are based on its iMiev vehicle, and the Peugeot 4007, Citroen C-Crosser and Mitsubishi Outlander are further examples of recent collaborations.
"We are discussing possible projects that could be beneficial to both companies. A capital tie-up is one of the options," Mitsubishi spokesman Kai Inada told AFP.
He said nothing has been decided on whether they will go ahead with a capital alliance.
If they did come together, it would create the world's sixth-largest car manufacturer with combined sales of roughly 4.45 million vehicles in 2008.