Defence giant BAE Systems and Airbus manufacturer EADS have confirmed that they are in talks over a potential merger deal.
BAE said a tie-up with EADS would create the world's biggest aerospace and defence company.
The merged group would see combined sales of £60 billion and employ 220,000 workers around the world, 48,000 of which are located in the UK.
The two companies are working on plans to create a combined group that would retain separate stock market listings.
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.
She said: “BAE Systems and EADS have a long history of collaboration and are partners in a number of important projects, including the Eurofighter.
“The potential combination would create a world-class aerospace, defence and security group with substantial centres of manufacturing and technology excellence in France, Germany, Spain, the UK and the US.”
The firms are also in talks with governments about the implications of a merger, given the sensitive and secure nature of their work.
BAE said the proposed deal would see BAE shareholders own 40% of the combined group and EADS shareholders own 60%.
A UK government spokesman said: “The business benefits of any such arrangements are a matter for the companies involved. However, given the nature of the companies' activities we would 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.”
Prime Minister David Cameron's official spokesman described the BAE deal as “a commercial matter”.
Under City takeover rules, both companies have until 5pm on 10 October to announce a deal or walk away.