France and Germany must reduce their stakes in European aerospace giant EADS if the Government is to allow a proposed merger with BAE Systems to go ahead, Defence Secretary Philip Hammond has warned.
Mr Hammond said it was a "red line" issue for the UK that the governments in Paris and Berlin gave up their ability to control the company.
He said the Government was prepared to use its "golden share" in BAE - Britain's biggest defence contractor - to veto a deal unless its conditions were met.
"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," he told BBC Radio 4's The World This Weekend.
"It is not, I think, 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. We want to see this company - and I think the management wants to see this company - prospering as a commercial business focused on doing the things that are right for the business, not being beholden to or controlled by any one government.".
David Cameron is under pressure from Tory MPs to block the merger unless the French and Germans give up their state holding completely, amid fears they could use their influence to move jobs away from Britain.
Meanwhile, BAE is reportedly facing a shareholder revolt over the deal, with a number of key stakeholders expressing frustration at the continued political wrangling between the three governments, according to The Sunday Telegraph. It is understood many investors have only been spoken to once by BAE management since plans for the deal surfaced last month and are growing increasingly angry at the lack of information.
BAE Systems has just four days before it has to agree the deal, abandon it or apply for more time from the UK Takeover Panel.
Meanwhile, fears are also mounting that the US government could prove the ultimate barrier to a merger following intense lobbying in Washington by the American aerospace and defence giant, Boeing. The German government may also block the move, it has been reported, after demanding that its stake is equal with France's and that the newly merged company's head office should be in Berlin. It is thought Germany is insisting on taking a 9% stake to match France's holding.
EADS chief executive Tom Enders - understood to be a long-term critic of EADS's state shareholdings - reportedly said earlier this week he would consider guaranteeing jobs as he seeks to win Germany's support for the deal without it insisting on a stake.