The London Stock Exchange joined its biggest European rival, Deutsche Boerse, in a surprise alliance yesterday, laying what both sides hope will be the foundation for a single European stock market.

Negotiated in secrecy over the past two months, the strategic pact unites the continent's two largest exchanges in a project to make it cheaper and easier to trade major European stocks.

It coincides with the introduction in 1999 of the euro, which is expected to force consolidation across Europe's plethora of financial markets and eliminate currency risk for investors buying stocks in other euro-zone countries.

"Through this plan, starting with combining the trading of leading German and British stocks, we aim to create the nucleus of a single European stock market, which will ultimately be based on a common electronic trading platform," the two exchanges said in a statement released at a news conference in London's Savoy Hotel.

The first fruit of the alliance will be a common package next year to deal in leading German and British shares. If successful, the link-up could then lead to a joint system trading 300 top shares from across the continent.

Those stocks would probably be based on the FTSE Eurotop 300 list of leading shares, London Stock Exchange (LSE) officials said. German bankers said they thought the common electronic trading system would probably be based on Frankfurt's existing Xetra technology, although no official decision had yet been reached.

London, once the unquestioned centre of financial market trading in the European time zone, has seen its lead sharply eroded by growing competition from Frankfurt. Trading of Europe's main bond futures contract evaporated from London's International Financial Futures Exchange (LIFFE) in a matter of months this year and some analysts feared the same could happen to stocks.

Frankfurt is home to the new European Central Bank which will manage the euro. London is the capital of a country that has opted to stay out of the single currency for the time being.

Mr Ian Beattie, head of developed markets at Edinburgh Fund Managers, said yesterday's alliance helped restore London's competitiveness and avoided the risk that Britain's main market would be sidelined.

The alliance may yet acquire a transatlantic dimension. The Deutsche Boerse chief executive, Mr Werner Seifert, said he would talk to New York's Nasdaq exchange about a North American link.

Both London and Frankfurt also said they would welcome new European partners for their venture but there were no immediate takers. The mood in Paris was glum because traders felt they could be sidelined by the move.

London-based equity traders and salesmen generally welcomed the prospect of consolidation offered by the alliance.

"This is a very good thing," said Mr Mark Howdle, head of European equity strategy at Salomon Smith Barney in London.

"It means lower transaction costs, deeper liquidity and lower settlement risk . . . which will make it easier for investors to invest in Europe." News of the linkup startled traders who had thought London would try to go it alone.

"It certainly caught people by surprise," said Mr James Dewhurst, an equities salesman at Charterhouse Tilney Securities. "I think (London) felt pressure over the euro."

The LSE chief executive, Mr Gavin Casey, denied at a news conference that he was forced into the link-up to avoid losing business to his German rival.

However, his Frankfurt counterpart, Mr Seifert, alluded to the long-standing rivalry between the two markets when he termed the alliance "not a marriage in heaven . . . but a partnership on earth".

The chief executives said they did not expect any competition problems with their alliance and, in Brussels, the European Commission welcomed the link-up.

London and Frankfurt will establish a 50-50 joint venture company to manage the initiative and will announce further details of its structure later.