Shares in British manufacturer BAE and European plane-maker EADS have plunged after the companies confirmed they were in advanced talks to merge.
BAE Systems shares plunged 7.3% by the close on Thursday - reversing a 7% spike on Wednesday amid speculation about the tie-up.
Shares in EADS, which makes Airbuses, fell by more than 10% in Paris.
The companies said they envisaged BAE shareholders owning 40% of the merged business, while EADS would hold 60%.
A union between the two businesses would form a "world class" company in its sector, BAE said in a statement, with combined sales of £60bn and around 220,000 staff.
In the UK, the merged group would employ around 48,000 people.
The new company would be a global aerospace and defence giant that could contend with defence cutbacks and better rival the US' Boeing and Lockheed Martin.
Governments across the world are being consulted about the deal because of the sensitive and secure nature of their work, BAE said.
The GMB union described the merger talks as "worrying" because of the number of highly-skilled engineers that work at the British company.
"The UK Government must play a proactive role as this company contains the skills vital to the defence of our nation," national officer Keith Hazlewood said.
"It is as important to our defence as the armed services which shows what is at stake here."
The Government confirmed it is aware of the proposal.
"The business benefits of any such arrangements are a matter for the companies involved," a spokesman said.
"However, given the nature of the companies' activities we would of course want to ensure that the UK's public interest was properly protected."
BAE specialises in defence, security and military, while the majority of EADS' work is in the commercial sector.