In a deal forged by the need to meet stringent emissions regulations in the United States, the German automaker will get a 16.6 percent stake in Navistar.
Navistar's stock was up 60 percent in early trading Tuesday. It later pared those gains, but still soared more than 40 percent on the day. The company has struggled over the past five years, with the stock falling about 65 percent.
As part of the agreement, the Volkswagen Truck & Bus division plans to invest $15.76 a share, or $256 million, into newly issued shares of Navistar, and reserves the right to appoint two directors.
Navistar expects to realize cumulative synergies of $500 million over first five years. Under the terms, the company will remain independent.
Navistar CEO Troy Clarke told CNBC's "Squawk Box" on Monday the alliance with VW takes advantage of "economies of scale" in what's increasing becoming a global industry.
Looking at the business landscape in truck manufacturing, Clarke sees a "bottoming phase," adding Navistar has worked hard to turn around the company.
The diesel emissions cheating scandal at VW on passenger vehicles did not impact the timing of the deal, Clarke said.
Volkswagen Trucks Chief Executive Andreas Renschler said a full merger with Navistar is possible once a technology and procurement alliance between the two truck makers takes shape.
In a call to discuss a technology and procurement partnership unveiled by the two companies on Tuesday, Renschler was asked whether he could foresee a full merger with U.S.-based truck maker Navistar.
"On our way to becoming a global champion all options are open," Renschler said.
Renschler repeated the answer when he was asked whether Volkswagen's truck and buses businesses could be spun off from the Wolfsburg, Germany-based parent company.