Plans for a $45-billion merger between EADS and BAE Systems veered towards collapse late on Tuesday as Germany appeared ready to block the deal in a row over national stakeholdings.
The setback came hours before a regulatory deadline and scuppered plans for a statement before European stock markets open on Wednesday, in which the aerospace groups had been expected to indicate progress by seeking more time for negotiations involving French, German and British officials.
Several sources close to the talks said German Chancellor Angela Merkel had signalled Berlin's opposition to the deal to create the world's largest aerospace and arms firm by uniting Airbus parent EADS with British defense contractor BAE.
"Merkel is against the deal but has not given reasons," a source involved in the negotiations told Reuters.
"Tonight, it is blocked," another person with detailed knowledge of the talks said, asking not to be named.
A spokesman for the German government declined comment.
The latest in a series of dramatic stops and starts since the word of merger talks first leaked on September 12 came shortly after the British and French governments reported progress.
Barring a last-minute turnaround, the companies were expected to negotiate right up to the 1600 GMT cut-off point set by British regulators, sources familiar with the matter said.
Negotiators described the atmosphere as tense and frustrated as bickering immediately broke out behind the scenes to lay off the blame in case the talks officially broke down.
Prospects for an extension to the deadline had risen earlier after sources involved in the talks said Britain and France had settled a dispute between them over setting a ceiling on the French state's shareholding in the future combined group.
But the deal, to replace national quotas with a more flexible overall cap, was rejected by Germany which wanted to ensure parity with the French stake, whatever that might be.
The three-way logjam has made it difficult to carve a path through national rivalries and competing economic and industrial policies, while also meeting demanding conditions for approval in the United States, a key client, especially for BAE weaponry.
EADS was set up in 2000 on the basis of strict power-sharing between French and German interests but until now Berlin's interests have been represented by a private industrial ally, car firm Daimler .
In the new combined group, Germany insisted on a state shareholding to match France's diluted government shareholding of 9 percent - or more if France added to its stake.
A German government source said EADS and BAE were caught in a web created by three national "red lines", none of which allowed for an agreement among Berlin, Paris and London:
"Germany and Britain could live with less state participation; France can't," the source said.
"France and Britain could live with the loss of the French-German parity; Germany can't. France and Germany could agree on a solution that would mean a bigger state participation if that keeps the parity; Britain disagrees."
But people in other camps expressed anger about the impasse, saying Germany had been offered what seemed to them generous terms, including a 9-percent shareholding matching France, a golden share and guarantees of jobs for Germans.
Two of these other sources said other parties to the talks had baulked at a German demand for the transfer to Germany of headquarters of either the space or helicopter divisions of EADS. This came on top of a row about where to site the corporate headquarters of the new combined group.
If the deal collapses, it will be seen as a personal blow for German-born Tom Enders, the head of EADS , and BAE counterpart Ian King. They have staked their companies' reputations on realizing a decade-old plan for an industrial giant embracing both western Europe's leading aerospace firms.
"If I wasn't a born optimist, I would not have started this project," Enders told EADS staff in an article marking his 100th day in the job.
European aerospace has a history of deals that refuse to die and EADS was itself only created after talks about its structure actually collapsed - only to be resurrected weeks later.
But with the current negotiations taking place in a glare of publicity, the margin for manoeuvre appears extremely tight.
A merger would combine the Airbus passenger planes and Ariane space rockets of EADS with BAE's Hawk trainer, Bradley Fighting Vehicles and submarines. The two companies already co-operate in making missiles and the Eurofighter combat jet.
The merger has faced growing unease from investors in both companies who complain they were ill-prepared and lack information. Many bought shares in EADS on the strength of its Airbus civil unit, rather than its defense ambitions, while BAE investors were attracted by the British firm's dividend yield.
Both EADS and BAE have said the investment case will become clear when they are allowed by regulators to hold briefings.
(Additional reporting by Gernot Heller, Matthias Blamont, Sophie Sassard, Paul Sandle, Chris Vellacott, Arno Schuetze, Elizabeth Pineau, Andreas Rinke, Adrian Croft, Sebastian Moffett, Mohammed Abbas, Julien Ponthus, Jason Neely, Blaise Robinson, Simon Jessop and James Regan; Editing by Jane Barrett and Alastair Macdonald)