BAe's Chief Executive John Weston said consolidation of European defence businesses was still "a key element of strategy."

"The proposed merger with Marconi Electronic Systems is an important step in that consolidation," he added.

Governments and defence groups in the UK, France and Germany have been involved in lengthy negotiations over possible mergers between defence companies including Germany's Dasa and France's Aerospatiale.

The Tornado: Part-exchanged for barrels of oil

But BAe's announcement at the start of this year that it had clinched a deal with British-based GEC led to reports that other European defence companies felt left out by the deal.

Shopping spree

BAe's declaration that it was still committed to a European merger came as the group reported its results for 1998.

Pre-tax profits before exceptionals were £685m, up from £599m in 1997. Turnover was down slightly to £7.04bn from £7.26bn in 1997.

The company also earned profits of £288m, including returns from selling part of its stake in Orange and its interests in Orion Network Services and the Arlington Securities business.

During the year BAe made several acquisitions including buying the Siemens Plessy electronics business and taking full control of the information technology joint venture, BAeSema, by buying out its partner Sema Group.

BAe also bought a 35% stake in the Swedish aerospace group, Saab.

Despite its heavy spending the group ended the year with a cash balance of £196m.

British Aerospace says it order book stands at record levels, worth £28.1bn($45.05bn), a positive sign for growth.

However, BAe said the Airbus consortium was experiencing pricing pressures at the smaller aircraft end of the market, which would continue to limit returns in the short term.

BAe said Airbus Industrie incurred an operating loss in 1998, of which its share after interest was £25m.

Saudi slashes oil barrels

Meanwhile, Saudi Arabia has cut its payments to BAe by a third as their huge, long-term arms contract enters a new phase.

Oil: Payment in kind for BAe's arms

The Al-Yamamah contract with Saudi, set up 14 years ago, involves the supply of arms from BAe in return for oil.

It has been cut from the equivalent of 600,000 to 400,000 barrels a day.

Company officials said the change was not a surprise because BAe has completed deliveries of Tornado fighter aircraft and the contract is moving into a maintenance phase.

Changes in the economic conditions for oil revenue-dependent Saudi Arabia have been continually assessed during the contract.

Oil prices are currently less than $11 dollars a barrel, near the historic low of $9.6.

On Tuesday, Saudi Defence Minister Sultan bin Abdel Aziz said that the contract was undergoing a "rescheduling".

He went on: "This not unusual. There are major states which have already carried out re-scheduling of their projects. But no project is frozen in any way."