The Financial Times has reported that BAe and Dasa - Daimler-Benz Aerospace - will merge early next year forming a holding company structured to allow other companies to join later.

However, BAe has issued a statement saying it is talking with Dasa but that it is "too early to say whether these discussions will result in definitive proposals".

The companies have been part of ongoing negotiations to form an integrated European defence aircraft group along with French company Aerospatiale and others in the region.

"BAe remains committed to achieving restructuring of the industry in Europe," the statement said.

Major merger delays

However, the privatisation of Aerospatiale by the French government has been the sticking point up to now in plans for a major merger.

BAe and Dasa still looking to assemble European aircraft giant

Other parties are unhappy that the French Government wants to retain 48% of Aerospatiale and have been applying pressure for full privatisation.

It has been speculated that BAe and Dasa have given up hope of a big one-step merger of the Continent's defence aircraft makers and will take the first step alone.

But the two companies are said to be anxious to avoid alienating other potential partners and want to create the new entity in a way that allows easy entry for other companies.

The Financial Times said a new merged company would be registered in the Netherlands and would combine the businesses of BAe and Dasa with an Aerospatiale representative to be invited onto the board of directors.

Governments and companies in the UK, Germany, France, Spain, Italy and Sweden have been negotiating for more than a year over the creation of a pan-European company to take on the US's Lockheed and Boeing defence giants.