One of the UK's largest manufacturers, BAE Systems, has confirmed it is in advanced talks to merge with aerospace company EADS.
If the deal goes ahead, shareholders in BAE would own 40% of the merged company, while Airbus-manufacturer EADS shareholders would have 60%.
Both boards must approve the agreement before October 10 or it will be called off, BAE said in a statement.
The tie-up would form a "world class" company in its sector, BAE said, with combined sales of £60bn and around 220,000 staff.
The aerospace giant 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.
BAE Systems, which employs 100,000 people across the world, is already partners with the Paris-listed EADS in a number of projects including the Eurofighter and MBDA joint ventures.
BAE's shares closed up 10.6%, while shares in EADS finished the day down more than 5.6%.
The merger is thought to have been under discussion for several months, spurred by declining defence spending in Europe and the US.
The larger aerospace, defence and security company would be able to better compete with its rivals including the US' Lockheed Martin and France's Dassault.