Hertz, the world’s largest car rental company, has agreed to buy its smaller rival Dollar Thrifty for $1.2 billion in a deal that heralds significant consolidation within the sector.

If completed the deal will strengthen Hertz’s share of the leisure market by adding another 1,550 locations to its global portfolio.

The cash-and-stock offer of $41 per share is at a 5.5 percent premium to Dollar Thrifty’s Friday close of $38.85, which values the company at $1.17 billion.

The deal, which will be 80 percent cash and 20 percent stock, is expected to bolster Hertz’s share of the leisure market. In its core US market, the only other publicly-listed company remains Avis Budget.

Hertz Chief Executive Mark Frissora said in a statement: “Dollar Thrifty also has a strong international presence, complementing our global footprint, which enables us to utilize a recognized brand to accelerate our leisure rental strategy in Europe and other market.”

Dollar Thrifty’sprimary market is the United States, where it rents cars under the Dollar Rent A Car and Thrifty Car Rental brands.

In a separate statement, Hertz raised its adjusted earnings outlook for 2010 to 43 cents to 45 cents a share from 37 cents to 39 cents a share, indicating an improvement in business trends as the car rental market recovers from the downturn.

Barclays Capital acted as lead financial advisor to Hertz.