Updated with press release and confirmation from the two companies at the end of the post. The current economic downturn has put a chill on telecom spending, forcing everyone from Alcatel-Lucent (s ALU) to Ciena Corp. (s CIEN) to run for cover. The situation is even more precarious for startups that find themselves in desperate competition for business. Against such a backdrop, we are hearing rumors that Turin Networks, a Petaluma, Calif.-based company is in merger talks with Force 10 Networks, a San Jose, Calif.-based 10 Gigabit Ethernet switch maker.

The news was confirmed a little while ago. As part of the deal, Henry Wasik, president and CEO of Turin Networks, will become the president and CEO of the combined entity.  Force10 Networks president and CEO James Hanley will now be president, field operations with responsibility for sales, marketing, services and business development.

The exact terms of the deal were not disclosedare not known, though I have heard that and the combined company would be called Force 10 Networks and would focus on the enterprise data center and service provider markets. Turin, among other things makes Ethernet transport and wireless backhaul gear. Wireless backhaul is a fast growing business, thanks to demand for 3G wireless broadband services. Force 10 Networks is a big player in the 10 Gigabit Ethernet market, another hot segment.

The problem for these two companies is that, while they were the first to arrive, other vendors have crashed their party.

Take Force 10 for example. It was the first one to figure out that there was a need for faster switches. Unfortunately, the market opportunity arrived with competition in tow. Force 10 faces a lot of competition from Cisco Systems (s CSCO), Foundry (now part of Brocade), Juniper Networks (s JNPR) and next-generation switching startups such as Arista Networks, Woven, and Blade Network Technologies.

Though it has moved into the hot virtualization market, Force 10 has other issues. It needs to beef up its services business along with its software side if it wants to play offense against its rivals. As for Turin, success at large U.S. carriers is still elusive, though it has found takers in overseas markets such as India.

Turin and Force 10 are not classic startups. They both started in 1999 and raised hundreds of millions of dollars. The first time I wrote about Turin and Force 10 was when the real Red Herring was still in business. Force 10 was slotted to go public, but the IPO markets never opened up for the company, which had raised a total of $113 million over its lifetime.

The two companies, according to my sources, should have a total revenue of nearly $100 million. Turin’s last reported revenues were estimated to be around $60 million, of which $40 million came from Carrier Access, a metro Ethernet equipment maker Turin acquired in 2007. Force 10 is said to have sales of over $36 million. The total revenues won’t be enough for the combined company to keep all 900 employees on the payroll.

Updated: Press release confirms the merger. Turin outlines the reasons for this deal.