The retailers have signed a definitive merger agreement and will combine as Sears Holdings. Together they will have a 3,500-strong national store network.
Kmart chairman Edward Lampert will chair Sears Holdings and will share power with incumbent Sears chairman and chief executive Alan Lacy and Kmart president and chief executive Aylwin Lewis.
Lampert, Lacy and Lewis will join a 10-strong Sears Holdings board comprised of seven current Kmart directors plus three from Sears.
'The combination of Kmart and Sears will create a powerful leader in the retail industry,' said Lampert. 'The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own.'
Together, the two companies are expected to generate US$500 million (£269.7 million) of cost savings over the next three years.
The merger is expected to be completed by the end of March next year, subject to shareholder approval.