The company said the joint venture would forge a stronger Dutch internet and mobile operator by bringing together Vodafone's mobile operation with Liberty Global's Ziggo broadband network.
The deal is expected to be sealed by the end of this year, subject to regulatory approval.
The Dutch tie-up will see Vodafone making a cash payment of one billion euros (£772m) to Liberty Global to "equalise ownership in the joint venture".
The companies predict the total cost and revenue synergies will hit 3.5 billion euros (£2.7bn), with costs of about 350 million euros (£270m) to combine the Dutch businesses.
Vodafone group chief executive Vittorio Colao said the deal would create "a strong and competitive integrated communications player" which would invest in digital infrastructure and entertainment services.
He added: "Together we will be a stronger competitor in the Netherlands, benefiting customers of both companies and the market as a whole."
The announcement comes after the two companies scrapped previous plans for assets swaps across Europe in late September.
Vodafone had always dismissed talk of a full-blown merger, but first sparked rumours of a £100bn deal when it said in June last year it had entered discussions regarding ''a possible exchange of selected assets between the two companies''.
Liberty Global is controlled by US cable tycoon John Malone, although it is focused on Europe.
The companies said the joint venture in Holland would fall under both the Vodafone and Ziggo brands and would create an integrated communications provider with 15 million revenues generating units, including 4.2 million video, 3.2 million high-speed broadband, 2.6 million fixed-line and 5.3 million mobile.
Liberty Global chief executive Mike Fries said the "powerful combination" would deliver huge benefits to Dutch consumers and businesses.
Vodafone notched up its sixth consecutive quarter of revenue growth, lifted by a strong performance in the emerging markets, when it updated to market earlier this month.
The Newbury-based group reported at the beginning of February that organic service revenue - a closely-watched measure of sales - had risen 1.4% to £9.2bn in the three months to the end of December last year, beating the 1.2% rise in the previous quarter.
It was buoyed by "strong" service revenue growth in its India and South African businesses, which grew 2.3% and 7.2% respectively in the third quarter.
The group also confirmed at the beginning of the month that it was on course to hit full-year earnings before interest, tax, depreciation and amortisation of between £11.7bn and £12bn.
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