EADS, the parent of Airbus, is in merger talks with Britain's BAE Systems in a deal that would topple Boeing to become the world's biggest aerospace giant.
Shareholders of EADS, or European Aeronautic, Defence & Space, would own 60 per cent of the combined group and BAE shareholders the remainder, BAE said in a statement.
Based on 2011 numbers, the combined company would have sales of about $92bn and 220,000 employees.
"BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects including the Eurofighter," BAE systems said in a statement.
BAE and EADS operates defence businesses in the US, UK, Germany, Spain, Saudi Arabia and Australia, among other countries. As such the companies have begun talking to governments about the implications, BAE said.
"On the face of it, this will create one of the largest aerospace and defence organisations on the planet [depending on how much they have to spin out to get this past regulators], and change the European defence market beyond recognition,” Guy Anderson, defence analyst at IHS Jane's, said.
"But a merger between BAE and EADS is unlikely and wouldn't happen without a lot of trials and tribulations. It would have to navigate onerous regulatory hurdles and sell off many overlapping chunks along the way.
"If it did go ahead, it would create a Goliath in terms of scale, putting BAE/EADS ahead of Boeing in revenues. However, there is no telling how much of the combined offering would have to be sold off to satisfy regulators."
Jim McNerney, Boeing chief executive, told Reuters news agency that his company was not threatened by the talks, and there may be more mergers in the defence industry as military spending in the US and Europe declines.
European governments have tried to engineer a merger in the past, but national interests have thwarted efforts. And BAE sold its stake in Airbus in 2006 to concentrate on its defence business.
"There is also an element of history repeating itself," Anderson said. "The Blair government was trying to steer British Aerospace [as it was then] towards DASA of Germany in the late 1990s. DASA tied up with Matra of France to form EADS, and the rest was history. British Aerospace, meanwhile, tied up with Marconi to form BAE Systems.
"There is a political dimension. The fact that the UK will keep a stake of sorts in the combined group bodes well and the UK-France defence pact shows that pragmatism can prevail.
"While the UK government holds a so-called golden share in BAE Systems, France and Germany have ensured the maintenance of a Franco-German balance in EADS through both private and state-holdings."