British Defence Secretary Philip Hammond said on Tuesday he expects BAE Systems and EADS to announce before the London stock market opens on Wednesday whether to seek more time for talks on a $45 billion merger.

"I think the companies now have a very clear understanding of the positions and the red lines of the governments involved," Hammond told reporters at a NATO defence ministers' meeting in Brussels.

The two companies have until 12.00 p.m. EDT on Wednesday to decide whether to proceed with talks on a $45 billion merger aimed at creating the world's largest defence and aerospace company.

A source familiar with the deal said a decision could be made as early as Tuesday evening, but it was unclear whether that would be announced publicly then, or on Wednesday.

"A decision will be made tonight or tomorrow," the source said.

Hammond said he understood BAE and EADS had started board meetings on Tuesday evening.

"They will go on possibly for some hours and they will make the decision whether they think that the parties are close enough together to warrant seeking an extension of time from the stock exchange and working on the deal further," he said.

"They will make an announcement, as I understand it, before the London Stock Exchange opens tomorrow," said Hammond, who discussed the merger with his French, German and U.S. counterparts on the sidelines of the Brussels meeting.

"Our red lines are well known. All other governments will have made their red lines known to the companies and the companies will have to make the decision now whether they think they can bring those positions together and make this deal happen," he said.

The plan to create a European defence and aerospace giant out of the two companies rest on a knife edge because of disagreements between the governments involved and criticism from private investors.

(Reporting by Adrian Croft in Brussels, Mohammed Abbas in London)