Defence Minister Philip Hammond warned on Sunday Britain could use its "golden share" to block a planned merger between EADS and BAE unless France and Germany agree to limit their stakes in the future company.
With time running out before the October 10 deadline for detailing the deal, talks have stalled over the influence each state will have in potentially the world's largest aerospace and arms group.
"We have made very clear that we do have red lines around the BAE-EADS merger and that if they can't be satisfied, then we will use our special share to veto the deal," Hammond told BBC Radio.
"It is not necessary to have no French or German interest in the company. It is necessary to reduce that stake below the level at which it can control or direct the way the company acts."
The merger would create an aerospace and defence giant with access to virtually all the world's markets, dwarfing even the US firm Boeing.
But Britain, Germany and France must approve the transaction in view of its strategic implications.
According to a source close to EADS, Germany has reached an agreement with its two partners to acquire a nine percent stake in the future firm, the same level as France, but halted talks while demanding the EADS headquarters be housed there.
Hammond later said that the headquarters of the defence arm must be located in London.
"We've made it clear that the defence part of the business will need to be headquartered in the UK," he told Sky News.
"We are quite confident that the other parties will agree to that."
Another source close to the talks said discussions were at an impasse because Paris was refusing to commit in writing that it would not seek to acquire more than a nine percent stake. France currently has a 15 percent stake in EADS.
Britain has said it would be satisfied with a "golden share" proposed by the three governments that would prevent any party from gaining more than 15 percent in the future company.
Britain is worried the United States might reject the future company if any one country possesses more than nine percent of the capital, a source close to EADS said.
In London, 45 Conservative British lawmakers urged Prime Minister David Cameron on Friday to obtain guarantees before he gives the operation his approval.
The British deputies were worried in particular about the implications of a tie-up for jobs in the country, and also pointed to the danger of being shut out of consideration for US defence contracts.
by Abdelmoneim Abu Edris Ali Â© 2012 AFP
Date: Oct 7, 2012