The new company would be run as a joint venture known as Penguin Random House, with the tie up expected to be completed in the second half of next year subject to regulatory approvals, the BBC reported.
British publisher Pearson owns Penguin books while English-language rival Random House is owned by German media giant Bertelsmann.
The German media giant Bertelsmann will own 53 per cent of the joint venture, Pearson will own 47 per cent.
The merger comes amid reports that Rupert Murdoch-run News Corp - which also owns Harper Collins - was bidding to make a substantial cash offer to takeover Penguin.
"The combination brings together two of the world's leading English language publishers, with highly complimentary skills," a statement by Pearson said.
"Random House is the leading English language publisher in the US and the UK, while Penguin is the world's most famous publishing brand and has a strong presence in fast-growing developing markets," it said.
Bertelsmann will nominate five directors to the board of Penguin Random House and Pearson four.
John Makinson, currently chairman and chief executive of Penguin, was to be chairman of Penguin Random House and Markus Dohle, currently chief executive of Random House, its chief executive.
"Our new company will bring together the publishing expertise, experience, and skill sets of two of the world's most successful, enduring trade book publishers," Dohle said.
"In doing so, we will create a publishing home that gives employees, authors, agents, and booksellers access to unprecedented resources," he said.
Based on recent results, combining the two firms will create a business with annual revenues of about 2.5 billion pounds.
In 2011, Random House's revenues were 1.7 billion euros with an operating profit of 185 million euros. Penguin recorded revenues of 1 billion pounds.
