The French state will be "particularly vigilant" on employment, governance and the overall industrial footprint of the new entity, the foreign ministry said on Wednesday.
France has a 12 percent stake in PSA, through the state bank BPI, with the Peugeot family and China holding similar shares.
The two groups said in separate statements that they were holding discussions aimed at creating one of the world's leading auto makers, worth $50 billion.
Talks to merge Fiat Chrysler (FCA) with Renault broke down in June, partly because of resistance from the French government, which also owns a stake in Renault, in addition to PSA.
France pushed for Renault to first resolve tensions with its Japanese partner Nissan.
If a combination of Peugeot and FCA succeeds in overcoming political, financial and governance hurdles, the new enterprise would still face challenges. Global automakers face the prospect of a slow down in demand, coinciding with the most dramatic technology changes in a century.
A merger would bring under one roof Alfa Romeo, Chrysler, Citroen, Dodge, DS, Jeep, Lancia, Maserati, Opel, Peugeot and Vauxhall.
They would open up each others’ markets, as FCA does not have a strong position in Europe, compared with PSA, which has seen record sales recently.
PSA is absent from the massive US market, where FCA has Chrysler plus the Jeep, Dodge and Ram brands.
Under the merger, PSA chief executive Carlos Tavares would lead the company, while FCA Chairman John Elkann would be chairman.
PSA's supervisory board is due to meet on Wednesday to discuss the potential deal, and according to Bloomberg News, FCA's board of directors is expected to hold an emergency meeting as well.
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