BAE Systems has signed a joint venture agreement with Italian defence group Finmeccanica.
BAE builds military and commercial aircraft
The electronics partnership, which will have combined sales of 3.8 billion euros (£2.6bn; $4.3bn), is be known as Eurosystems.
The companies have been looking to consolidate their defence systems businesses for some months.
They have signed a memorandum of understanding that will create three joint venture partnerships.
In a joint statement, the companies said: "A lot is still left to be done before the new businesses are operational, but we are convinced that we can create firms capable of fully satisfying the needs of our customers."
BAE Systems is understood to be continuing its search for a potential merger partner.
The most recent name linked to the UK-based aerospace giant was US firm General Dynamics.
It has also been linked with Boeing, but may need to find a buyer for its shipbuilding interests to make it a more attractive merger proposition.