The Manchester-based organization announced it has entered an agreement to acquire Bristol-based Somerfield on a cash-free, debt-free basis.
Somerfield operates around 880 outlets across the UK and in the year to April 2008 generated net sales of £4.2bn, with earnings
before interest, tax and depreciation of £233m.
The deal ends months of uncertainty - Somerfield was put up for sale in January and the Co-operative express an interest in April
The combination of Somerfield and the Co-operative will see a grocery business of more than 3,000 stores with net sales of around £8bn.
The group says the move will make it the market leader in convenience food retailing and the fifth largest food retailer in the UK, with a market share of 8%.
The Co-operative is now expected to sell off some of the Somerfield outlets, with chains such as Waitrose, Morrisons and Iceland showing interest.
Peter Marks, chief executive of The Co-operative Group, said: "This is good news for consumers and for competition in the grocery market where we will create a stronger fifth player in food and a convenience store chain with unrivalled geographic reach.
"The acquisition of Somerfield will provide the rocket fuel for our three-year growth plan, outlined in April of this year. Under this plan we are revitalising our retail estate under a single unified brand - modernising our stores, improving our product offer and service levels for customers and members and reinforcing our Co-operative difference.
"There is a strong strategic fit between the two businesses, with both focused on the highly competitive top-up and convenience shopping market. We anticipate real cost and revenue synergies, enabling us to enhance still further the overall value we deliver to our customers.
"Given a deal of this nature, there are likely to be some local competition issues. We are confident we will be able to work through these with the Office of Fair Trading."
Paul Mason, Chief Executive of Somerfield, said: "The Co-operative Group and Somerfield have a similar focus in terms of customers, store types, product ranges and business vision. Our shared vision of providing a high quality and affordable convenience offer to local communities means that together we will be twice as strong and therefore twice as able to deliver the local grocery shops British customers demand."