China's two largest online video websites Youku and Tudou plan to merge through a stock swap to forge an industry leader in the world's biggest Internet market.

Youku is listed at the New York Stock Exchange while Tudou issued an initial public offering on the Nasdaq market in August 2011. Once the deal is completed, Tudou will delist its shares.

The new entity, named Youku Tudou Inc. will control more than a third of the country's online video advertising market, according to the Internet research firm Analysys International.

The merger came as a huge surprise as Youku had in February filed a lawsuit against Tudou, claiming that it suffered losses because Tudou accused it of misusing copyrighted material.

"We expect to see significant synergies across a number of areas including leveraging licensed content over a larger user base and realizing efficiencies in bandwidth management," said Victor Koo, CEO of Youku.