One sells 18-carat, white-gold cocktail watches embossed with diamonds for $54,000 (£26,140); the other offers plastic Dracula wristwatches detailed with flying black bats for $50 (£24.20). One came to symbolise glamour in popular culture in the 1960s; the other came to symbolise kitsch pop culture in the 1980s. There are not an obvious fit – at first sight, anyway.

Nevertheless, Tiffany, the upmarket jeweller, and Swatch, the world’s biggest watchmaker, are to go into partnership. Swatch is to set up a company that will use Tiffany’s designs and branding to sell watches that will be manufactured and distributed through the global Swatch network.

Swatch has the upper hand in the deal. The new company will be wholly owned by Swatch and will be based in its home country of Switzerland, while Tiffany will have one seat on the board and will receive an undisclosed share of the profits. Swatch, which has signed a 20-year agreement with Tiffany, will also manufacture existing Tiffany designs, add new ones and open stores under the Tiffany name outside the United States.

As Americans struggle with falling property prices and rising fuel costs, demand for $54,000 cocktail watches is expected to be challenging in the year ahead. Already, Tiffany has been forced to cut its prices to stimulate demand and in a filing to the US Securities and Exchange Commission yesterday, Tiffany said that it would take a $20 million charge related to the cost of discounting some of its existing watch collections.

It has not been disclosed whether the ticket price of Tiffany watches will fall signicantly or whether Swatch will launch a budget version of a Tiffany-branded item.

Wall Street reacted nervously to the jeweller’s third-quarter earnings, which were published on Friday. Even though sales for the period came in at the top end of Wall Street expectations, Goldman Sachs told its clients that the shares were likely to suffer because of weakening American demand and tough comparisons with the year before.

Yet the two companies are not as different as you might think. While Swatch is far bigger, with $4.4 billion of sales in 2006 compared with Tiffany’s $2.6 billion for the same period, it has aspirations to attract buyers with a much bigger budget. Yes, Truman Capote, in his novella Breakfast at Tiffany’s, and Audrey Hepburn, irresistible as Holly Golightly in the film it inspired, made the jeweller even more famous than it was, but Swatch has big names, too. It owns Omega and Breguet, the watchmaker that boasts of having had Napoleon, Marie-Antoinette and Tsar Alexander 1 of Russia among its customers.

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