Defence giant BAE Systems has confirmed talks over a potential merger with Airbus aircraft manufacturer EADS to create the world's biggest aerospace and defence company.
BAE said a tie-up with European Aeronautic, Defence & Space (EADS) would form a "world class" firm in its sector, with combined sales of #60 billion and around 220,000 staff.
The merged group would employ around 48,000 in the UK alone.
A BAE spokeswoman said it was too early to confirm whether there would be any job losses, but stressed there was very little overlap between the two business activities.
Shares in London-based BAE soared 11% on news of the talks.
BAE said the proposed deal would be a merger, but would see BAE shareholders own 40% of the combined group and EADS shareholders own 60%.
The two groups are working on plans to create a combined firm that would retain its dual listing.
BAE said: "BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects, including the Eurofighter."
It added: "The potential combination would create a world class international aerospace, defence and security group with substantial centres of manufacturing and technology excellence in France, Germany, Spain, the UK and the USA."
BAE said that the firms were in talks with governments worldwide about the implications of such a deal, given the sensitive and secure nature of their work.
Under City takeover rules, both firms have until 5pm on October 10 to announce a deal or walk away.
BAE is an expert in the field of defence, security and military, whereas the majority of EADS's work is in the commercial sector.
EADS, which is a consortium of aerospace and defence manufacturers from France, Germany and Spain, is headquartered in Paris and Berlin.
BAE produces Astute nuclear-powered submarines and is the largest supplier of land vehicles to the US army.
But BAE has been under pressure, reporting a 14% fall in sales last year as military spending in the US and UK was cut.
This saw 2011 profits fall 7% to #2 billion.
The group said defence spending had reduced in its largest markets - the UK and the US - while it was also hit last year by a delay in an order for Eurofighters to Saudi Arabia.
Keith Hazlewood, national officer of the GMB union said: "This is a worrying development as so much of our high-end engineering and manufacturing skills are embodied in this company.
"The UK Government must play a proactive role as this company contains the skills vital to the defence of our nation. It is as important to our defence as the armed services which shows what is at stake here."
A Government spokesman said: "We are aware of this proposal. The business benefits of any such arrangements are a matter for the companies involved.
"However, given the nature of the companies' activities we would of course want to ensure that the UK's public interest was properly protected.
"We are working with the companies to ensure that this is the case. Given the market sensitive nature of transactions of this sort we would not want to comment further at this stage."