In exchange for the Uber China assets, Uber and its Chinese partners will receive shares equivalent to 20 per cent of Didi Chuxing, a statement said.
The combined Chinese firm will be valued at $35 billion, Bloomberg News reported.
Since Uber launched its China operations little more than two years ago both companies have spent billions of dollars on subsidies for drivers and passengers in China, as well as trading vitriolic accusations, as they fought for dominance in the potentially lucrative market.
But now the companies’ founders will swap public acrimony for seats on each other’s boards, with Uber CEO Travis Kalanick joining Didi’s board of directors, and Didi’s founder Cheng Wei getting a seat at Uber’s top table.
In the Didi statement, Cheng said the two firms “have learned a great deal from each other over the past two years in China’s burgeoning new economy”.
Earlier this year Uber said it lost $1 billion annually in China, and Didi was thought to be dropping similar amounts of money.
A lengthy post on Kalanick’s verified Facebook page Monday called Uber’s battle in China a “big, bold idea” and “one of the most rewarding experiences I’ve had as an entrepreneur”.
“Most people thought we were naive, crazy – or both” because the firm was “a young American business entering a country where most US internet companies had failed to crack the code”, he said.
His at times elegiac farewell praised the company’s China team as “the smartest and most entrepreneurial sons and daughters of China” who were “nobly serving” China’s cities.
But he went on: “As an entrepreneur, I’ve learned that being successful is about listening to your head as much as following your heart.”
A sustainable business was “only possible with profitability”, he said, and the merger would free up “substantial resources”.
He signed off the post “with much UberChina love”.
The deal comes days after Chinese authorities announced new rules governing ride-sharing, making clear for the first time that they may operate legally in the country.
The new rules will also forbid ride-sharing platforms from operating below cost, possibly restricting their scope to offer subsidies.
Rides in major cities with Uber and Didi have often cost significantly less than regular cab fares due to the subsidies, and many drivers work for both companies at the same time.
One Didi driver was reluctant to believe the news of the merger Monday. “If it is true, the allowance offered by Didi or Uber now will certainly decrease.” the man, surnamed Su, told AFP.
Didi, which claims almost 90 per cent of the China ride-hailing market, said last month that it had recently raised $7.3 billion – $1 billion of which came from Apple – in one of the world’s largest private equity financing rounds.
As part of the merger, Didi Chuxing will also take a stake in Uber, with reports saying it will invest $1 billion, valuing the US firm at $68 billion.
Uber has become one of the world’s most valuable startups as it has expanded to more than 50 countries. But it has faced regulatory hurdles and protests from established taxi operators in most locations where it has launched.
Its China business partners include internet search giant Baidu and state-owned Citic Securities. Didi’s backers include e-commerce titans Alibaba and Tencent, along with China Life, the country’s biggest life insurer.
Analysts noted that the deal would create a massive single company with near-monopoly power in China.
Others saw it as a capitulation by Uber in the face of an overwhelming local rival.
“Uber knows when to fold them in China, after being engaged in an incredibly expensive ride war with Didi there,” technology journalist Kara Swisher wrote on her recode.net site.
“Cutting the massive losses in China and turning it into a more solid investment” would clear the way for an expected Uber public stock offering next year, she added.
Reports in May said Didi was also mulling an initial public offering in New York in 2017.