BAE said a tie-up with European Aeronautic, Defence & Space (EADS) would form a “world class” firm in its sector, with combined sales of £60bn and around 220,000 staff.
The merged group 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.
Shares in London-based BAE soared 11 per cent on news of the talks.
BAE has 1,100 staff at Brough and a training academy at Doncaster’s Robin Hood Airport.
BAE said the proposed deal would be a merger, but would see BAE shareholders own 40 per cent of the combined group and EADS shareholders own 60 per cent.
The two groups are working on plans to create a combined firm that would retain its dual listing.
BAE said: “BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects, including the Eurofighter.”
It added: “The potential combination would create a world class international aerospace, defence and security group with substantial centres of manufacturing and technology excellence in France, Germany, Spain, the UK and the USA.”
BAE said that the firms were in talks with governments worldwide about the implications of such a deal, given the sensitive and secure nature of their work.
Under City takeover rules, both firms have until 5pm on October 10 to announce a deal or walk away.
BAE is an expert in the field of defence, security and military, whereas the majority of EADS’s work is in the commercial sector.
EADS, which is a consortium of aerospace and defence manufacturers from France, Germany and Spain, is headquartered in Paris and Berlin.
BAE produces Astute nuclear-powered submarines and is the largest supplier of land vehicles to the US army. But BAE has been under pressure, reporting a fall in sales last year.