The new joint venture would be based in Italy and involve the design, development, production and maintenance of the drones, Leonardo said in a statement.
"The European market for the next ten years, covering unmanned fighters, armed surveillance drones, and deep strike drones, is projected to reach 100 billion dollars," it added.
Arms industry orders have been increasing due to rising defence budgets in Europe in the wake of Russia's 2022 invasion of Ukraine.
Leonardo and German arms maker Rheinmetall unveiled last October a joint venture to develop tanks for the Italian army and other military vehicles.
Alongside BAE Systems and Japan Aircraft Industrial Enhancement Co, Leonardo is also involved in a project between the UK, Italy and Japan to develop a supersonic next-generation fighter jet.
"With Baykar, we are creating a new reference player in unmanned technologies, which will play an increasingly central role in the future of defence," said Roberto Cingolani, chief executive of the Italian firm.
He added: "The defence industry is facing unprecedented challenges, such as unmanned systems, artificial intelligence, sixth-generation fighters, cybersecurity, and space.
"In this context, we are convinced that technological cooperation is both necessary and urgent to accelerate progress and ensure global security."
Baykar -- which last December received the green light from Italy's government to buy Piaggio Aerospace -- highlighted its own "superior capabilities in UAV and artificial intelligence technology".
The memorandum of understanding announced Thursday would see this combined "with Leonardo's mission systems, payloads and certification capabilities", it said.
"The two companies will also carry their cooperation into the field of space studies," the Turkish company said.
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