Under the deal, GM will take a 7% stake in Peugeot, making GM the second biggest shareholder in the French firm after the Peugeot family.
The two firms will share engineering development and hope to launch the first common design by 2016.
They hope to save money by combining purchasing and by 2017 they expect to save some $2bn (£1.3bn) a year.
Both companies have been struggling in Europe. GM's European brand, Opel, brand lost $747m (£472m) last year.
|PSA Peugeot Citroen sales fell 9% in |
Europe las year
Philippe Varin, chairman of the managing board of PSA Peugeot Citroën said: "With the strong support of our historical shareholder and the arrival of a new and prestigious shareholder, the whole group is mobilized to reap the full benefit of this agreement."