The acquisition will give YIT the size to compete better in its core Nordic markets as well as Russia, following a drop in profits due to the Ukraine crisis, Russian recession and weakened rouble.
Lemminkainen shareholders will receive 3.6146 new shares in YIT for each share held, valuing Lemminkainen at 27.29 euros per share, a 40 percent premium to its closing price on Friday.
Shares in Lemminkainen jumped 40.6 percent to 27.34 euros, while YIT was 4.8 percent higher at 0837 GMT.
"The combination is expected to create significant value for the shareholders of the combined company through decreased sensitivity to economic cycles and improved competitiveness providing a strong platform for growth," the firms said.
The combined company will have sales of about 3.4 billion euros and it is expected to generate annual synergies of some 40 million euros by 2020. YIT shareholders will own 60 percent of the firm and Lemminkainen's owners the remaining 40 percent.
"It makes sense, both companies needed more size. Synergies seem to be very significant if they can achieve them. The businesses complement each other with not very much overlaps," said Kepler Cheuvreux analyst Hjalmar Ahlberg, who has a "hold" rating on YIT's stock.
The deal is subject to approvals by shareholder meetings due on September, as well as competition authorities.
The company and analysts said they were not expecting objections from antitrust authorities as big Swedish players NCC and Skanska, as well as smaller local rivals, are active in the Finnish market.
More than half of YIT's and Lemminkainen's combined sales in 2016 came from Finland, while the rest was generated in other Nordic and Baltic countries, Russia and Central Eastern Europe.
(Reporting by Jussi Rosendahl; editing by David Clarke)