This is Fiat Chrysler's second bid this year to reshape the global auto industry as it faces huge challenges with the transition to electric and autonomous vehicles. Carmakers across the world are grappling with one of the biggest and most expensive upheavals in the industry's history as they move away from fossil fuels and towards battery electric vehicles and autonomous technology.
A statement said the discussions were ongoing 'aimed at creating one of the world's leading mobility groups, ' but did not specify whether the goal was a full merger or a looser alliance. Volkswagen in July said it will work with Ford Motor Co. on electric and self-driving vehicle technology, while Toyota Motor Corp.is strengthening ties with partners such as Subaru Corp. and China's BYD Co.
However, both PSA and Fiat Chrysler have factories across Europe running below capacity, meaning rationalisation and closures are likely to create savings.
"If completed, we believe this should ignite more rational industry behavior around allocation of capital, and this particular merger makes materially more sense than a potential FCA-Renault merger", said Arndt Ellinghorst, an Evercore analyst.
"FCA needs scale in Europe and PSA has no presence in the USA, where FCA has market share for sale", said Philippe Houchois, an autos analyst at Jefferies.
FCA has been looking for a partner for some time; and earlier this year the carmaker held extended talks with Groupe Renault over a possible partnership.
Under one iteration of a deal, PSA would combine with FCA in an all-stock merger that would see Mr Tavares run the business, while John Elkann - the scion of Italy's Agnelli family, which controls FCA - would become its chairman, one person said.
Fiat Chrysler Automobiles was formed in 2014 out of a merger of Italian auto maker Fiat and the American company Chrysler, which Fiat brought back from the brink of bankruptcy.
The revived talks come months after FCA withdrew its proposal for a 33 billion euro merger with Renault, just days after the original proposal was made. The automaker already operates a small car-sharing service called Free2Move, which is largely confined around major US airports, and Peugeot is confirmed to arrive sometime in the next decade.
Elkann courted PSA before talks heated up with rival Renault past year.
-With assistance from Gabrielle Coppola, Daniele Lepido, Liana Baker, Siddharth Philip, Tian Ying, Anurag Kotoky and David Welch.