EU defence ministers have agreed to open up billions of euros of military spending to cross-border competition.
European defence orders are worth 30bn euros ($35bn) per year
From July, EU states which sign up to a voluntary code of conduct will post defence orders on an internet site and accept bids from any other EU state.
The aim is to make European defence industries more efficient, and to help them compete with international rivals.
Countries will still be able to exempt the most sensitive orders from rules on competitive tendering.
However, signatories of the code of conduct will monitor each other for abuses of the exemption clause, known as Article 296.
"This is a landmark decision," said Javier Solana, the EU's foreign and security policy representative.
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European Aeronautic Defence and Space company
"It will mean a better deal for European taxpayers and for their armed forces. And it is a vital step for ensuring that our defence industries remain globally competitive."
Currently more than half of the 30bn euro ($35bn; £20bn) annual arms procurements in the EU are closed to competition.
European leaders hope that more competition will encourage the restructuring of the EU's fragmented national defence industries.
When Europe's largest defence contractor, the European Aeronautic Defence and Space company (EADS), was formed from the merger of French, German and Spanish defence companies in 2000, some observers expected a wave of consolidation in the European defence sector.
However, this failed to materialise.
Denmark opts out
The Aerospace and Defence Industries Association of Europe (ASD) backs the new code of conduct - but would prefer it to be binding rather than voluntary.
French Defence Minister Michele Alliot-Marie said the code imposed a "moral obligation"
Under the voluntary scheme, all orders of more than one million euros ($1.17m) will be posted on the electronic portal.
EU states have until April to decide if they want to take part.
Denmark is reported to have already opted out, and officials say Spain also has doubts because it wants to protect small-scale arms manufacturers.
Although the code of conduct is not legally enforceable, French Defence Minister Michele Alliot-Marie said participating countries would be under a "moral obligation".
Seven of the world's 10 biggest defence companies are American. The biggest European companies are BAE Systems, EADS, Thales and Finmeccanica.