UPDATE 4-EADS, BAE call off world's biggest arms merger

(Adds company/CEO quotes, sources on German position, updatesshares)

* Companies say they have terminated discussions

* Sources said Germany opposed the $45 billion aerospacemerger

* BAE shares down 1.75 per cent, EADS up 3.4 per cent By Sophie Sassard and Jason Neely

LONDON, Oct 10 (Reuters) - EADS and BAE Systems called offthe world's largest defence and aviation merger on Wednesday,and sources close to the talks blamed Germany for wrecking the$45 billion deal.

BAE said it had become clear that the interests ofthe French, British and German governments could not bereconciled with each other or with the objectives that BAE andEADS established for the merger.

"BAE Systems and EADS have therefore decided it is in thebest interests of their companies and shareholders to terminatethe discussions and to continue to focus on delivering theirrespective strategies," BAE said in a statement.

Securing such an enormous and complicated cross-border dealin a sector where commercial considerations are typicallytrumped by political, economic and national security concernswas always going to be desperately difficult.

The companies had until 1600 GMT to declare their intentionsand either scrap the merger, ask British regulators for moretime or finalise their plans to create a group employing nearlyquarter of a million people that could compete with U.S. rivalBoeing .

"Germany blocked the deal, although all demands from theGerman side were met. Top German negotiator Lars-Hendrik Roellerwas the one who formulated all demands and said no in the end,"a source close to the deal said. Roeller is Chancellor AngelaMerkel's senior economic adviser.

Before the talks collapsed, several sources close to thenegotiations had said Merkel opposed the proposal to combineAirbus passenger aircraft with UK defence contractor BAE.

"Merkel is against the deal but has not given reasons,"another source involved in the talks had said.

Sources said Germany had wanted parity with France in theshareholding of the new group, plus the basing of some companyheadquarters in the German city of Munich.

"France and the UK agreed that Germany have the samestakeholding as France in the merged group. Separately, vastguarantees were given regarding safeguarding national securityinterests, sites, jobs. The topic of headquarters was beingdiscussed very emotionally, but not an issue big enough to letthe deal fail," a source close to the transaction said.


Graphic on EADS/BAE market cap and share prices:

Factbox on the two companies:

Text of BAE/EADS statement



At 1234 GMT BAE shares were down 1.75 percent at 319.7 pencein London, while EADS shares were up 3.4 percent at 26.98 eurosin Paris.

Brinkmanship is common in European negotiations, andFranco-German-led EADS - whose full title is the EuropeanAeronautic Defence and Space Company - was itself only createdafter talks about its structure collapsed and were resurrectedweeks later.

"It is, of course, a pity we didn't succeed, but I'm glad wetried. I'm sure there will be other challenges we'll tackletogether in the future," said Tom Enders, EADS chief executive.

The merger had faced growing unease from investors in bothcompanies who complained they were lacking information. Manypeople bought shares in EADS on the strength of its growingAirbus civil unit, rather than its defence ambitions, while BAEinvestors were attracted by its dividend yield.

Germany does not currently have a direct stake in EADS, butis represented by industrial ally Daimler AG , whichholds just over 22 percent. France holds an identical stake,split between the state and French publisher Lagardere.

The British government holds a golden share in BAE thatallows it to block foreign takeovers.

Adding to the hurdles facing the deal, BAE's largestshareholder, fund manager Invesco Perpetual, with 13.3 percent,had said it was not convinced of the strategic rationale for thecombination.

(Additional reporting by Matthias Blamont, Arno Schuetze, PaulTaylor, Andrea Shalal-Esa and Tim Hepher; Writing by writing byWill Waterman)

((tim.hepher@thomsonreuters.com)(+33 1 49 49 54 52)(ReutersMessaging: tim.hepher.thomsonreuters@reuters.net))

Keywords: EADS BAE/