Britain and France have made progress in talks over a possible cap on state shareholdings in any merger between EADS and BAE Systems, but any deal must overcome possible opposition from Germany, sources briefed on the matter said.
In a proposed compromise hammered out in several days of talks, France would be able to increase its stake but only if an overall ceiling on state shareholdings in the new aerospace group were respected.
"For this to work, it would mean breaking the link between the potential future size of the French shareholding and the German one," a diplomatic source following the talks said.
Germany has so far insisted on parity with France and it is unclear how Berlin would react to the proposal, but a German opposition parliamentarian voiced pessimism about the deal going ahead in the absence of a clear political strategy.
(Reporting by Tim Hepher, Gernot Heller, Paul Taylor)