UAL Corp, parent company of United Airlines, said it will buy Continental Airlines Inc for about $3.17 billion in stock, forming the world’s largest carrier and further consolidating the U.S. airline industry.

If approved by regulators and shareholders, the deal is expected to produce $1 billion to $1.2 billion in annual revenues and cost benefits for the combined company by 2013. One-time costs of about $1.2 billion are expected over a three-year period.

The deal marks the first major U.S. airline merger since Delta Air Lines Inc.’s 2008 purchase of Northwest Airlines Inc., and caps months of speculation that more industry consolidation was ahead.

Continental shareholders will receive 1.05 shares of UAL common stock for each Continental common share they own, Reuters reported. Based on UAL’s stock price of $21.60 on Friday afternoon, and Continental’s 139.6 million outstanding shares as of April 21, United would pay $3.17 billion for Continental, or $22.68 a share. That represents a 1.5 percent premium over Friday’s closing price.

The name of the combined airline will be United Airlines. The name of the holding company will be United Continental Holdings Inc.

Continental CEO Jeff Smisek will run the Chicago-based combined airline, which will have more than $29 billion in annual revenues, while UAL CEO Glenn Tilton will be non-executive chairman. Smisek, 55, will become executive chairman when Tilton steps aside, which is expected to happen two years after the merger closes.

Based on current shares outstanding, the combined company would have 314.5 million shares, and present UAL shareholders will own roughly 55 percent of them.

Tilton said in a message to employees this morning that “some reductions in the salaried and management work force” for both companies would result.

United and Continental said their merger would expand service with minimal domestic and no international route overlap. The combined company will have 10 hubs, with Houston as its largest, and a work force of nearly 90,000.

The companies expect to complete the transaction in the fourth quarter of 2010.