In a surprising twist, Arthur Andersen has decided to merge with Ernst & Young to form the largest audit firm in the Middle East, confirmed Hamed Kazim, managing partner of Arthur Andersen, Dubai.

In March, Arthur Andersen and PricewarterhouseCoopers had signed a memorandum of understanding whereby PwC Middle East was to acquire the Mideast operations of Arthur Andersen.

In a note yesterday, Michael J. Stevenson, senior partner of PwC Middle East stated that his firm has ceased discussions with Arthur Andersen Middle East.

"Despite cordial and business-like talks with Arthur Andersen Middle East over recent weeks, we have decided that it is in the best interests of our practice to cease these discussions because we have been unable to reach final terms," Stevenson said. He refused to give further details.

Queried about the PwC note, Hamed Kazim said, "I don't know anything about PwC move to cease talks with us. We had been talking with PwC on the merger. We have now decided to merge with Ernst & Young".