A dream line-up of the some of the world's biggest music acts, including Madonna, the Spice Girls, Robbie Williams and Janet Jackson, was assembled yesterday through the £12bn merger of Britain's EMI and the record labels of US group Time Warner.

The deal to create Warner EMI will be formally announced this morning and will catapult the combined group to the top of the music business charts alongside Sony, Germany's Bertelsmann and Universal PolyGram. Warner EMI will have sales of more than £5bn a year and account for almost one in every four CDs sold worldwide.

The merger has been driven chiefly by the increasingly global nature of the £23bn music market, which is seeing the same acts charting in cities from Bangkok to Berlin.

It is also a tacit acknowledgment of the profound impact that the internet will have on music distribution and is part of the continued convergence of old and new media.

The deal will mean that America Online, which acquired Time Warner earlier this month, will end up as the one of the largest record companies in the world - a testament to the growing power of the internet over the music industry.

EMI recently predicted that 10% of its sales would be generated via the internet within five years and had already begun making investments in a series of web-based music firms. Industry experts believe it is only a matter of time before most music is sold over the internet, by downloading directly onto recording devices.

Directors of EMI and Time Warner were locked in the offices of City investment bank Warburg Dillon Read yesterday negotiating the final details of the transaction and issued only a brief statement saying that the merger would "represent an opportunity to establish the world's premier music group".

EMI, which began life as the Gramophone Company in 1897, was the last sizeable British music group.

"It's a shame to see the last major British music company effectively fall into overseas hands," said Alison Wenham, chief executive of the Association of Independent Music.

The merger unites labels including WEA, Elektra, Atlantic, Virgin, Capitol, Chrysalis, and Blue Note.

EMI made £75m profits in the first half of its financial year on sales of just over £1bn, with its most notable success coming in Japan where the company sold 9m units of schoolgirl Utada Hikaru's R'n'B debut album First Love. Warner's sales are focused in the US, where it had 23 of the top 100 albums during 1998.

Music sales worldwide have been sluggish recently. The industry has suffered in comparison with the sustained period over which buyers replaced their vinyl collections for CDs.

Consequently the industry has witnessed a succession of large-scale mergers including Canadian group Seagram, which owns the Universal business, acquiring PolyGram. The Warner EMI tie-up is likely to face intense scrutiny from competition authorities.

There was some speculation last night that Bertelsmann, which had been named as a potential bidder for EMI in recent weeks, may attempt to spoil the party with Time Warner or else try a merger with another of its rivals.

Although EMI and Time Warner will have equal stakes in the new company the US giant will be firmly in the driving seat. The new business will have headquarters in New York, and Roger Ames, head of Warner Music Group, will be installed as chief executive. Costs of up to £300m are likely to be stripped out through combination of the two groups' promotion, marketing and distribution networks, which could spell job losses in Britain.

The British music industry contributes £3.2bn to the economy and employs 130,000 people, with British artists accounting for 10-15% of worldwide sales.

EMI has been the subject of almost constant takeover speculation for the past two years. It saw off a hostile approach from Seagram and has also been linked with Rupert Murdoch's News Corporation and Walt Disney.

EMI will retain its quote on the London stock market but will effectively become a holding company for its share in the joint venture.

Time Warner

Tori Amos

Phil Collins

Sinead O'Connor

REM

Madonna

Eric Clapton

Cher

Missy Elliott

Bjork

AC/DC

En Vogue

Tracy Chapman

Catatonia

Simply Red

Alanis Morissette

EMI

Spice Girls

Geri Halliwell

Fatboy Slim

Beatles

Rolling Stones

Sting

Prodigy

Martine McCutcheon

David Bowie

Janet Jackson

Lenny Kravitz

Robbie WIlliams

Genesis

Queen

Blur

Radiohead

Britney Spears