Put on the auction block by Germany's Merckle family as its business empire crumbled, Ratiopharm vies with Stada (STAGn.DE) for second place among Germany's generics makers, trailing Swiss drug major Novartis's NOVN.V Hexal business.
None of the other companies have yet commented on the deal.
Trade in Teva shares, Israel's largest company, with a market value of about $57 billion, was halted until 1220 GMT, having risen 1.78 percent to 228.5 shekels after sources broke the story.
Before Teva put out its statement, Ratiopharm owner VEM had called a news conference for 1300 GMT to announce what is the biggest takeover of a copycat drugmaker since Teva's $7.5 billion purchase of U.S. rival Barr, announced in July 2008.
Ratiopharm's last three suitors, whittled down from about a dozen in November, had until Thursday to submit final bids, several sources had said.
Teva, number four in Germany's generics market, will jump straight to the top spot with Ratiopharm in its stable.
"It's a very good fit for Teva, and the market will view it positively," said Gilad Sarig, an analyst at Bank Hapoalim. "Teva would have liked to get it for less, but it had competitors."
Analysts at Credit Suisse have said a takeover would move Teva's global generics market share to around 19 percent, widening the gap over No. 2, Novartis's Sandoz unit, at about 11 percent.
Potential synergies that Teva may capture could be at least in the $100-$150 million range, said Jefferies analyst David Windley in a February 4 note.
The deal would also reduce Teva's reliance on Copaxone, the most commonly used multiple sclerosis drug, which accounts for 20 percent of group sales.
"We anticipate Teva would be able to achieve manufacturing/raw material synergies as well as tax advantages from Ratiopharm," JP Morgan analyst Chris Schott wrote in a March 8 research note.
The deal could add 3-5 percent to earnings per share in the long term, Schott said, assuming then that the deal would cost Teva about 3 billion euros.
Israel's Teva has said it plans to more than double global sales and almost triple sales in Europe by 2015, a venture analysts say would require acquisitions worth $15 billion.
Pfizer CEO Jeff Kindler, used to getting his way on acquisitions, will now likely train his sights on German generic drugmaker Stada, sources told Reuters earlier.
Stada's shares were up 0.5 percent at 29.55 euros, having gained more than 20 percent so far this year.
Using the Ratiopharm price tag as a guide, Pfizer would have to stump up at least 3.2 billion euros for Stada, based on deal value including assumed debt as a multiple of 2009 core profit, a premium of 18 percent over the current market value.
Industrial heir Ludwig Merckle put Ratiopharm up for sale as part of concessions made by his father Adolf Merckle, who threw himself in front of a train in January 2009 shortly after ceding control of his business empire to its creditors.
The Ratiopharm money looks set to let the Merckle family hold on to Phoenix, Europe's second-largest drugs distributor.
Ludwig Merckle has recently turned down offers for Phoenix, even though his creditor banks had tried to persuade him to consider them, sources close to the matter said.
Commerzbank (CBKG.DE) and Royal Bank of Scotland (RBS.L) managed the Ratiopharm sale. (Additional reporting by Philipp Halstrick and Alexander Huebner in Frankfurt, Quentin Webb in London, Tova Cohen in Tel Aviv, editing by Will Waterman).