Germany's DaimlerChrysler Aerospace (DASA) and France's Aerospatiale-Matra announced on Thursday they are to merge to form Europe's biggest air and defence group - and one which is big enough to challenge US giants Boeing and Lockheed.

Lagardere, which, along with the French government, owns the majority of Aerospatiale-Matra, said BAe had been invited to take part in a future united Airbus firm, and a German official said he was "sure" talks would now take place for BAe to join in the full merger.

Dr Rainer Ohler spokesman for DASA: "The door is still open"

"The company is open for further partners, it is open to British companies, open to Spanish companies and open to to Italian companies, " a spokesman for Dasa said, adding that "this is not the end of the story of European consolidation."

BAe is already involved in the Airbus passenger jet project along with Dasa and Aerospatiale.

The combined group will have sales of about 21 billion euros ($22.5bn) and employ more than 89,000 people.

Merger flurry

If regulatory and competition authorities approve the link-up, the European Aeronautics, Defense, and Space Company (EADS) will start operations in the first half of 2000.

British Aerospace shares dropped 6% after the announcement, on fears that it would be isolated from European defence industry consolidation.

Sir Raymond Lygo former Chief executive of BAe gives his reaction to the announcement"

The merger is the latest in a flurry of consolidation announcements from Europe's aerospace and defence industry, aimed at making it more competitive following the end of the Cold War.

European companies already cooperate in building Airbus commercial planes and Eurofighter and Tornado military jets, but industry insiders fear that unless they pool their skills, finances and research more closely, they will be picked off by US firms keen to expand into European markets.

Approval likely

The European Commission is thought unlikely to to block the proposed merger between the two, European lawyers said. "This merger will have no difficulties," Mr Brian Hartnett, with the Brussels practice of US law firm Squire Sanders & Dempsey said.

Dasa's chief executive Manfred Bischoff had earlier said he did not anticpate the merger to encounter any problems with the European Commission.

'Ground-breaking deal'

DaimlerChrysler said EADS would be the world's second largest civilian aircraft manufacturer - after Boeing - through Airbus, and the world market leader through Eurocopter.

Paul Beaver from Jane's Defence Weekly: "BAe have led this merger"

It will also be the world leader in satellite launching systems through Ariane and a leading provider of satellites, military aircraft and defence systems.

DaimlerChrysler Chief Executive Juergen Schrempp and Lagardere head Jean-Luc Lagardere described the agreement as a ground-breaking deal for consolidation of the European aerospace and defence industry and said it would enhance profitability.

"The merger will also enable DaimlerChrysler to lead from a position of strength which will result in a new dimension of profitable growth," Schrempp said.

Lagardere said: "Aerospatiale Matra looks forward to working together as part of the same company."

European defense ministers have long urged rival firms to join together, but national pride and state ownership (in the case of Aerospatiale) blocked the completion of the deal.

Frustrated by the lack of progress, British Aerospace then merged with the defence electronics arm of GEC, Marconi.