The combined group will process over three billion litres of milk every year and have a turnover of more than £2bn.
Arla uses the dairy brands Cravendale, Lurpak and Anchor in the UK.
Milk Link, which is based in Bristol, has a joint venture with Arla in Wiltshire and the companies share facilities at Lockerbie.
Arla Foods is a co-operative owned by Danish, Swedish and German dairy farmers, operating in 13 countries and employing 17,000 people.
It is currently building one of the world’s largest dairies in Buckinghamshire.
The £150m development near Aston Clinton will be finished by the summer of 2013 and will employ 700 people.
Peter Lauritzen, chief executive of Arla Foods in the UK said: “Arla has a strong record of investing in facilities and brands in the UK.
“Together we will be able to offer British retail and foodservice customers with a full range of high quality dairy products from a single, secure, source, making us an even more attractive partner for British retailers.”
Milk Link turned over £628m last year and has eight processing sites across the UK employing 1,300 people.
Neil Kennedy Milk Link’s chief executive commented: “Milk Link’s 1,600 British dairy farmer members will have a stake in one of Europe’s largest and most successful dairy businesses and play a positive role in its future development.
“Our farmers will benefit from Arla Foods’ long term strategic vision, global scale, broad product and customer base and proven track record in investing in the development and growth of leading dairy brands.”
The merger has to be approved by Milk Link Members, the Arla Foods board and the regulatory authorities.