John Weston, BAe chief executive, told the Financial Times newspaper that the company was in talks with the government and would decide the fate of its munitions business within a year.

Mr Weston said the government would have to decide whether it was prepared to pay above average prices to maintain the UK's munitions industry for strategic reasons.

He said the company could not sustain the factories without a higher return and needed to run them so that their survival did not depend on winning each new order.

Sensitive business

Royal Ordnance has a dozen factories across the UK and employs more than 4,000 people.

The firm makes ammunition at Chorley, Lancashire, Birtley, Durham, Glascoed, Gwent, and Wolverhampton in the West Midlands.

It produces small arms in Nottingham, where it also makes guns and vehicles, and small arms ammunition at Radway Green in Cheshire.

It makes electronics and fuses at Blackburn, Lancashire, and explosives and propellants at Bishopton, near Glasgow, and Bridgewater in Somerset, as well as the Netherlands.

Closing the factories would be regarded as politically sensitive, because the United Kingdom's armed forces would be without a domestic supplier and would depend on foreign companies in a conflict.

The company has been facing a fall in demand for ammunition since the end of the Cold War.

It has also been hit by the production of bulk ammunition by lower-cost producers in South Africa, Israel and Portugal.