Two of Britain’s biggest package holiday firms are joining forces after MyTravel and Thomas Cook announced a £3 billion merger today.

The enlarged group will be based in the UK, listed in London as Thomas Cook plc and 52 per cent owned by KarstadtQuelle, the German parent of Thomas Cook.

Peter McHugh, the chief executive of MyTravel, said that the deal would create an even stronger rival to TUI, the owner of Thomson, in the package holiday market, with an annual turnover of £8 billion and 19 million customers a year.

But there will be fears of widespread job losses among the combined firm's 19,000 UK staff as it seeks to cut costs by £75 million a year. Mr McHugh said: "There will certainly be some job cuts."

News of the deal caused shares of MyTravel to soar 36.5 per cent, or 87p to 325p, but sent First Choice, its fierce rival. into a tailspin, down 16.4 per cent.

First Choice had been hoping to sell its package holiday business to MyTravel or Thomas Cook in an £800 million auction. Mr McHugh confirmed that the new company had scrapped plans to bid for the business.

The deal today seals a successful turnaround for the American, who has helped to guide MyTravel back from the brink of collapse five years ago after an accounting scandal.

The group, best known for its Airtours brand, made its first profit last year since the 9/11 terrorist attacks.

Mr McHugh will step down at the end of December after helping to integrate the two businesses. The group will be chaired by Thomas Middelhoff, the Thomas Cook chairman.

The merger is expected to be completed by June. It will be effected through the acquisition by a new company of both MyTravel and Thomas Cook.

MyTravel shareholders will own a 48 per cent stake in the new business.

Manny Fontenla-Novoa, the chief executive of Thomas Cook, said that the deal created huge opportunities for the bigger business.

He added: “This is a merger of some very, very powerful brands, and we are very, very excited about bringing them together.”

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts