The Financial Times reported that discussions had been taking place between the two companies and their relationship was becoming increasingly close.

A spokesman for DASA confirmed that talks had taken place but said their object was to unify the whole of the European aircraft industry.

"We are working with all our strength on a realisation of a single European aerospace concern," commented spokesman Christian Poppe.

Pressure on the French

The prospect of a merger between the two companies may have influenced the French government to announce on Wednesday plans to privatise the French aircraft manufacturer Aerospatiale amid fears that it would be left out of the consolidation of the European defence industry.

Aerospatiale is to be merged with Lagardere, whose missile business, Matra, will become part of the new company, and will overtake British Aerospace to become Europe's largest defence firm.

Daimler-Benz chairman Jurgen Schrempp met French finance minister Dominque Strauss-Kahn last week to urge French participation in the consolidation process.

The privatisation of the French company was a pre-condition to such participation.

But the two companies may proceed with a merger if the privatisation is delayed.

The American challenge

European defence and industry ministers have been urging the private defence contractors to merge for some time. Consolidation is seen as the only way that the fragmented European defence industry can compete with the giant American firms Boeing, Lockheed, and Raytheon.