A marriage of BHP and Rio would assemble a massive corolling force across a range of industrial-use commodities such as copper, aluminium, iron ore and coal, but would likely face competition concerns.
They already jointly own Escondida, the world's largest copper mine in Chile, and both operate diamond mines in Canada and mine iron ore in Australia.
Analysts said a takeover would set off alarm bells for regulators especially in iron ore, where Rio and BHP are the world's second- and third-biggest producers respectively, behind Brazil's CVRD.
BHP said it was aware of competition issues, but gave no details about how it would overcome them.
"In preparing its proposal, BHP Billiton has examined in detail the regulatory issues and other practicalities of a combination," BHP said in its statement.
Analysts and fund managers said disposals were certainly part of BHP's game plan in seeking to swallow Rio Tinto.
"They must have taken into account that maybe as a combined group they would have to dispose of something. They've got the opportunity to pick the best assets of both companies and sell the worst assets," said portfolio manager Henk Groenewald at Coronation Fund Managers in Cape Town.
M&A Has Slowed
News of BHP's proposal comes amid a general downturn in mergers and acquisitions as banks rein in lending in response to losses on low quality U.S. mortgages.
"Clearly, one has to distinguish between M&A that might be funded by capital in credit markets, and here it would appear that it is a share exchange," Insight Investment fund manager Tim Rees said.
"It shows the clear scale of the synergies that might be available (and also) shows confidence within the mining industry about the global economy."
Investment banker John Meyer at Fairfax in London said the cost synergies are expected to total than $1 billion.
Long-standing speculation of a tie-up between BHP and Rio had gathered pace after Rio completed its $39.1 billion purchase of aluminium group Alcan on Wednesday.
Separately, Rio Tinto said on Thursday it was considering selling its Energy America unit, the second-largest U.S. coal producer.