BAe is thought to be ready to pay £8bn for GEC's Marconi defence electronics firm.

GEC's core business, electronic systems, communications, power systems and others are not part of the deal.

The defence business is consolidating fast

If confirmed, the merger or BAe and Marconi would create Europe's largest defence contractor. The combined group would have a market value of £17bn ($28bn) and sales of £14bn. The merger could create cost savings of £250m a year, which might also mean big job losses.

The GEC board is scheduled to meet on Wednesday, but sources close to the company suggest a deal could be finalised even sooner. "I'd be very surprised if it didn't go through now," one source said.

The deal is expected to boost shares on the London stock market, which has already been encouraged by Vodafone's takeover of US rival Airtouch to create the world's largest mobile phone company.

Shares in British Aerospace were up strongly, gaining 3% at the market's opening to reach 538p, while GEC shares gained 1%.

Rival bids

GEC has also been linked to the French firm Thomson CSF which also has a large defence electronics business. Reports said that Thomson chairman Denis Ranque had promised that GEC would remain the majority partner in any link-up, but the French company was reported to be prepared to bid only £6bn.

The move is part of the consolidation of the European defence industry following the end of the Cold War. Politicians have been urging a link-up between British Aerospace, Germany's DASA, and France's Aerospatiale, in order to compete with US giants like Boeing and Lockheed.

That deal has been held up by the reluctance of the other partners to join up with Aerospatiale, as long as the company is still largely owned by the French government.