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

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

* Companies say they have terminated discussions

* Sources said Germany opposed the $45 billion aerospace merger

* 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 off the 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 of the French, British and German governments could not be reconciled with each other or with the objectives that BAE and EADS established for the merger.

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

Securing such an enormous and complicated cross-border deal in a sector where commercial considerations are typically trumped by political, economic and national security concerns was always going to be desperately difficult.

The companies had until 1600 GMT to declare their intentions and either scrap the merger, ask British regulators for more time or finalise their plans to create a group employing nearly quarter of a million people that could compete with U.S. rival Boeing .

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

Before the talks collapsed, several sources close to the negotiations had said Merkel opposed the proposal to combine Airbus 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 the shareholding of the new group, plus the basing of some company headquarters in the German city of Munich.

"France and the UK agreed that Germany have the same stakeholding as France in the merged group. Separately, vast guarantees were given regarding safeguarding national security interests, sites, jobs. The topic of headquarters was being discussed very emotionally, but not an issue big enough to let the 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 pence in London, while EADS shares were up 3.4 percent at 26.98 euros in Paris.

Brinkmanship is common in European negotiations, and Franco-German-led EADS - whose full title is the European Aeronautic Defence and Space Company - was itself only created after talks about its structure collapsed and were resurrected weeks later.

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

The merger had faced growing unease from investors in both companies who complained they were lacking information. Many people bought shares in EADS on the strength of its growing Airbus civil unit, rather than its defence ambitions, while BAE investors were attracted by its dividend yield.

Germany does not currently have a direct stake in EADS, but is represented by industrial ally Daimler AG , which holds 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 that allows it to block foreign takeovers.

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

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

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

Keywords: EADS BAE/