The boards of the two groups have mandated their respective teams to finalise discussions and reach a binding memorandum of understanding in the coming weeks, the two automakers said in a joint statement.
Fiat Chrysler shares rose sharply after news of the talks and ended up more than 7.5% in U.S. trading. The companies and the French government had no comment.
Batteries produced in the new complex will be used by the new generation of full electric models that the company is planning to roll out, Fiat Chrysler (FCA) said in a statement.
The study by the consulting firm, which was published on June 26, shows how hard it is for carmakers to meet European rules for cutting average fleet emissions for passenger cars to 95 grams of carbon dioxide per kilometre by 2021.
The merger would have created the world's third-largest automaker, behind Volkswagen and Toyota.
Renault is pushing for a full merger between the pair but there is deep skepticism of the plan at Nissan.
The French government said it had placed four conditions on the deal, and getting support from Nissan was the condition that wasn't met.
Renault, whose longstanding alliance with Japan's Nissan is in trouble, expressed its "disappointment".
Renault and Nissan representatives were meeting outside Tokyo on May 29 along with officials from the third partner in their alliance, Mitsubishi Motors.
Bruno le Maire said he has asked for "four guarantees" for the deal to go ahead, including that not a single job or factory on French soil will disappear.
In 2018, Volkswagen said it was open to deeper alliances particularly in the area of autonomous driving with Ford.
'After careful review of the terms of FCA's friendly proposal, the board of directors decided to study with interest the opportunity of such a business combination, comforting Groupe Renault's manufacturing footprint and creating additional value for the Alliance,' Renault said in a statement.
Renault's current major partnership is with Japan's Nissan, in which it holds 43 percent.
An agreement might ultimately lead Fiat Chrysler to join the Renault-Nissan-Mitsubishi Alliance in the future, a media report suggests.
Regulators said Fiat Chrysler used "defeat devices" to cheat emissions tests in real-world driving.
The automaker will pay USD 305 million in penalties to the federal government and California, which also brought suit, the NYT said, citing two unidentified sources who were briefed on the issue.
The sale is the first big decision for newly minted FCA Chief Executive Mike Manley, who took over in July when long-time boss Sergio Marchionne fell ill and later died after succumbing to complications from surgery.
"When we learned Sergio Marchionne could not return to work the board decided to appoint Mike Manley, who was the only candidate," Chairman John Elkann said.
In response of the complaint, M&M and its subsidiary Mahindra Automotive North America (MANA) have filed a public interest statement with the ITC.
The carmaker said British-born Manley, who also takes responsibility for the North America region, will push ahead with the mid-term strategy outlined last month by Marchionne, who had been due to step down next April.
A large number of FCA workers have been on state-sponsored layoff schemes after the carmakers failed to launch new models in the recent past
Fiat Chrysler said it would create 2,500 jobs at a factory in Warren, Michigan, near Detroit and invest $1 billion in the facility. The Mexican plant will be "repurposed to produce future commercial vehicles" for sale global markets. Mexico has free trade agreements with numerous countries.
Matthias Mueller told the Journal that a new team was working to sell businesses no longer considered critical.
"With respect to this case, we currently have an intention to acquire. We are interested in (FCA)," the company official in Great Wall's press relations department, who declined to give his name, told Reuters over phone.
The annualised pace of U.S. car and light truck sales in July fell to 16.73 million vehicles, down from 17.8 million vehicles a year earlier, according to Autodata Corp, which tracks industry sales.