EADS is tightly controlled by a shareholder pact linking the French state, which owns 15 percent, with Germany’s Daimler and French media firm Lagardere.

“BAE has told EADS it will walk away if it cannot remove the voting block rights and have a normalised governance structure and normal shareholder rights,” a source close to BAE said.

“SPECIAL RELATIONSHIP”

Weekend reports highlighted the risks to BAE’s U.S. defence sales if France’s role encroaches on the commercial dividends of Britain’s “special relationship” with the United States, where EADS recently clashed with a defence lobby.

Britain’s former First Sea Lord, Admiral Lord West, warned that the BAE-EADS deal would cost jobs and threaten Britain’s security if it went ahead, according to The Times newspaper.

In France, the key question is whether French President Francois Hollande is ready to accept the full privatisation of EADS after a previous Socialist government started the process by marrying state Aerospatiale to Lagardere in the late 1990s.

The prospect has triggered debate within the new Socialist government which has so far displayed a hands-on approach to industry by intervening to halt factory closures and save jobs.

If the plan is accepted, the French government and Daimler are expected to maintain a diluted stake of 9 percent in the new group with broadly the same rights as other shareholders.

EADS has clashed with Germany in the past over defence priorities but Berlin’s most immediate priority is likely to be securing guarantees over Airbus jobs following a recent row.