In a surprising blockbuster merger that would expand the reach of the world's largest drug company, Pfizer Inc. (PFE) has agreed to buy rival Pharmacia Corp. (PHA) for $60 billion in stock.

The deal has been approved by the boards from both companies, Pfizer spokeswoman Mariann Caprino said Monday.

"It's a compelling strategic fit for Pfizer," Caprino said.

The merger would create a company that produces many of the common prescription drugs found in medicine cabinets around the world.

Already the world's biggest drug company before the deal, Pfizer's products include Viagra (anti-impotence), Lipitor (cholesterol) and Zoloft (depression), while Pharmacia's major drug is the arthritis medication Celebrex.

Pharmacia also makes the Rogaine hair products and the Nicorette smoking cessation line. Pfizer's over-the-counter products include everything from Listerine mouth wash and Rolaids tablets to Halls cough drops and Visine eye drops.

The new company would have combined annual revenue of $48 billion and a research-and-development budget of more than $7 billion.

"Combining Pfizer with Pharmacia is a strategic opportunity that immediately creates a global pharmaceutical company with unsurpassed resources and capabilities," Fred Hassan, chairman and chief executive officer of Pharmacia, said in a statement posted on Pfizer's Web site.

Said Hank McKinnell, chairman and chief executive officer of Pfizer: "By combining with Pharmacia, we are ensuring that our core capabilities in the discovery, development and commercialization of new medicines are strong around the world."

The timing of the deal is surprising considering the overall health of the economy and the many obstacles facing the drug sector.

Pharmaceutical companies are experiencing intense competition from generic drugs, pressure on prices from the federal government and a growing number of patents that are expiring. Their stock prices have fallen in recent months along with the rest of the market as distrust in corporate America grows almost daily amid several high-profile accounting scandals and bankruptcies.

The erosion of investor confidence and the downturn in the economy has created a major slump in merger and acquisition activity.

In the first six months of the year, only $200 billion in transactions in the United States was announced, according to Thomson Financial. At current prices, a Pfizer-Pharmacia merger alone would add up to more than a quarter of that amount.

The Pfizer-Pharmacia deal was first reported by The New York Times and The Wall Street Journal for Monday editions. Under the deal, Pharmacia shareholders would receive 1.4 shares of Pfizer stock for each share in Pharmacia -- a 36 percent premium over the company's Friday closing price of $45.08.

The deal still needs approval from regulators and shareholders, but the Times and Journal reported that it is not expected to run into any major snags.

Pfizer, whose stock soared in the late 1990s with the success of Viagra, is no stranger to mega-mergers. In 2000, it completed a $115 billion acquisition of Warner-Lambert, gaining control the cholesterol-lowering drug Lipitor in the process.

That deal ranks as of the largest global mergers ever.

Pharmacia, based in Peapack, N.J., was created through the merger of Pharmacia of Sweden and Upjohn Co. The company has 59,000 employees in more than 60 countries.

Pfizer, based in New York City, employs about 90,000 workers.