Last ditch talks to salvage the 28 billion pound merger of BAE Systems and EADS were taking place on Wednesday as a deadline for the deal approached.

The two firms have until 5pm (4pm GMT) to announce the terms of the merger or ask for more time to finalise their plans, under rules set down by the UK's City Takeover Panel.

The main obstacle to a deal seems to be disagreement over the level of government ownership for the UK, France and Germany.

There are reports that German Chancellor Angela Merkel is against the deal and that her government had demanded the joint firm be headquartered in Munich.

UK Defence Secretary Philip Hammond said that France and Germany must reduce their stakes in EADS if the UK was to allow the merger to go ahead.

However, Invesco, the largest shareholder in BAE, has also voiced "significant reservations" over the tie up and the impact it could have on shareholders.

David Reeths, Director, Consulting for IHS Jane's, said that unless there was movement toward agreement on the core issue of government ownership, it was "only a matter of time until the companies announce that they are calling off the merger, at least for the time being".

"Extending the deadline will not change the dynamics of the negotiation and would almost certainly weaken the positions of [Chief Executives] King and Enders going forward as it would signal they felt they had no other acceptable options," he said.

Reeths said if the deal went through it could be "momentous" for the defence industry.

"Quite simply, this would set the stage for a true European defence industry that could be sustainable instead of the patchwork of unsustainable national defence industrial bases that currently exist," he said.

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