The Finnish telecom giant has agreed to give shareholders in its Franco-American rival 0.55 shares in the new merged company for every one of their own.
The new group "will be uniquely positioned to create the foundation of seamless connectivity for people and things wherever they are," Nokia's statement said.
It will go by the name Nokia, be based in Finland, and be run by Nokia's current management team, it said.
Shares in the French telecommunications company plunged more than 10 percent on Paris's stock market within ten minutes of the announcement – dropping 10.51 percent to 4.01 euros, far underperforming the overall market which was trading down 0.17 percent.
The group is targeting savings of 900 million euros ($960 million) in costs by the end of 2019 without further job cuts following the restructuring, both companies said, adding that the merger should save an additional €200 million in financial charges.
Alcatel-Lucent boss Michel Combes, told French TV channel BFM Business that the new group was committed to "increasing R&D activities in France by 25 percent" by hiring 500 additional researchers, bringing the total research and development workforce in the country to 2,500.
"The new group's innovation and research capabilities on a global scale will be spearheaded in France," he said.
The French government said Tuesday it was concerned about jobs disappearing in France if the merger were to go through.
Rumours have swirled since December of a possible deal between the two firms, with France's Les Echos reporting on Monday that executives had been in negotiations since January.
Nokia was the world's biggest mobile phone maker for more than a decade until it was overtaken by South Korea's Samsung in 2012.
Then in 2014, Nokia sold its mobile phone and tablet division to US software giant Microsoft, and the company now develops mobile and Internet network infrastructures for operators.
Nokia is now set for a significant boost in market share.
The deal will also help Nokia bolster its mobile infrastructure business against Swedish arch-rival Ericsson and China's Huawei, profiting from Alcatel's position as a leading supplier of 4G and LTE mobile networks and related services.