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The £7.7bn deal on Tuesday created one of the world's biggest defence firms and looks to have scuppered the vision for a pan-European defence conglomerate.

Downing Street has denied reports Prime Minister Tony Blair has been critical of the deal and would have preferred the much-anticipated tie-up of major EU defence contractors to challenge US domination of the industry.

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Mr Blair had encouraged European consolidation talks between BAe, Germany's DaimlerChrysler Aerospace (Dasa) and France's Aerospatiale. These talks broke down late last year.

A spokesman for Mr Blair said the prime minister was hopeful talks between UK and continental companies would continue.

Europe scorned

However, in Europe there is clearly ill-feeling over the UK tie-up that looks like scotching such hopes.

Dasa reacted strongly, saying it made a merger between BAe and its own organisation impossible and that it was now looking to the US for partners.

"Talks between us and transatlantic companies have intensified very recently and we are also talking to other European defence firms," a Dasa spokesman said. "We cannot exclude a race with BAe to consolidate on the European market."

Meanwhile, French company Thomson CSF has also criticised the arrangement after it had proposed a merger with GEC's Marconi.

The prospect of GEC and BAe joining forces emerged when GEC announced in December it would split off its Marconi defence arm from its electronic businesses, creating an opening for BAe.

There is also speculation the merger might be referred to the UK Monopolies and Mergers Commission.

BAe shares bounced back from Tuesday's slide after the merger announcement and were 22 pence, or 5%, higher at 447p by 1240 GMT. GEC was down 22 at 524p.

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The merged business, worth around £17bn, will be the world's third largest aerospace business after the two US giants, Boeing and Lockheed Martin.

Combined sales at the new company will total £12.5bn and it will employ 99,000 people worldwide, the majority in the UK.

It means the UK has a defence company capable of competing with its American rivals.

A spokesman for BAe said he could not rule out job losses.

World leader

BAe chairman Sir Richard Evans said: "This merger represents an important step in the restructuring of the aerospace and defence industry in Europe.

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"The combination of these businesses creates a company with unrivalled global reach, world-leading technology and the strength to compete at all levels in the world market."

Under the deal, GEC shareholders will receive shares in the enlarged company, called New British Aerospace, owning around 37% of the enlarged business.

GEC chief executive Lord Simpson said the merger was a win-win deal for shareholders, giving them a stake in the enlarged BAe and a more focused GEC.

Job guarantees

Union leaders are to seek urgent talks. They hope that the multi-billion pound link-up will not lead to huge job losses.

A series of meetings will be held at the scores of British Aerospace and Marconi plants across the country to give workers details.

The giant new company's staff will range from Trident submarine workers in Barrow-in-Furness to Airbus workers in Chester and Bristol.

Although cost-cutting was not the main objective of the deal, the two companies said the merged group would be able to make cost-savings of around £275m over the next three years.

A Marconi spokesman said redundancies could not be ruled out but added that he believed any job losses will be minimal.