NEW YORK, Sept 23 (Reuters) - Internet service providers EarthLink Network Inc. (Nasdaq:ELNK - news) and MindSpring Enterprises Inc. (Nasdaq:MSPG - news) on Thursday agreed to a $1.6 billion merger that will create the No. 2 Internet access provider in United States.

The deal, a stock swap, forms a new company with an estimated market capitalization of $3 billion, annualized revenues of nearly $650 million, and a combined cash balance of more than $500 million, the companies said.

The combined company, which will retain the EarthLink name and stock symbol but will be domiciled at MindSpring's Atlanta headquarters, would form the nation's second largest Internet service provider (ISP) after America Online Inc. (NYSE:AOL - news). But even as a No. 2 with 3 million subscribers, EarthLink will lag far behind AOL's subscriber base -- 17 million flagship members and another 2 million CompuServe members.

Under terms of the agreement, MindSpring and EarthLink will merge into a third, newly-created company. MindSpring holders will receive one share in the new company for each MindSpring share, and EarthLink holders will receive 1.615 shares in the new company for each share of EarthLink.

Under those terms the deal is valued at about $1.6 billion, according to Securities Data Corp.

EarthLink shares were up more than $2 at $45.81 on the Nasdaq stock market. MindSpring shares dropped more than $3 to trade at just above $29.37.

``The ISP business is kind of a market that has a Coke but not a Pepsi,'' said Glenn Powers, an analyst at Cruttenden Roth Inc. ``The whole dynamic of the market has been around that number-two slot, and now it's not a race.''

``Now AOL is the Coke, the new EarthLink is the Pepsi. And there are a thousand other colas,'' Powers said.

Analysts also maintain that this type of consolidation is just the beginning of a trend in the ISP market, where smaller companies will be joining forces to vie for the No. 2 position, which could in turn pressure AOL into finding new ways to increase its lead.

``There's a threat as such to AOL in that their position is not guaranteed,'' said Rob Norcross, vice president at Mercer Management Consulting.

``That everyone over at AOL is surprised, I just don't buy that,'' he said, referring to the EarthLink, MindSpring deal.

``They (AOL) have to know that there is going to be a consolidation of the ISPs beneath them and they also know that they have to keep moving because they're obviously now the clear market leader, but they can't maintain the type of share that they have,'' Norcross said.

``There are going to be people jockeying,'' he said. ``Maybe not for No. 1, but to be a much more viable No. 2.''

Charles Brewer, founder, chairman and chief executive of MindSpring, will serve as the new company chairman. EarthLink President and CEO Charles ``Garry'' Betty will be CEO of the new company. Sky Dayton, EarthLink's founder and chairman, will retain a board seat.

Mike McQuary, MindSpring's president and chief operating officer, will serve as president after the merger.

McQuary said along with the four new board members, MindSpring will bring in four members from its existing board and EarthLink will bring in two additional members.

Sprint Corp. (NYSE:FON - news), which currently has a 28 percent stake in EarthLink, will have two people on the board of the new company and will have the option to buy shares of the new company at market price within six months in order to maintain its ownership percentage.

A spokesman for Sprint said the company is ``very supportive'' of the deal between EarthLink and MindSpring, and said it has not made a decision on whether it will top up its shares in the new EarthLink.

Under terms of the deal, each company granted the other the option to buy up to 19.9 percent of the other's common stock under certain conditions. The deal is expected to close in the first quarter of 2000.