The new plane will refuel fighter jets in flight

The move is a blow for the firms behind a rival bid - UK defence contractor BAE Systems and its US partner Boeing.

BAE was last week blamed for contributing to a �3bn overspend in the UK's annual defence budget.

But ministers denied the firm would be punished for past mistakes, including cost overruns on major contracts.

Big win

The Ministry of Defence (MoD) said the European consortium offered better value for money and talks will now take place on a PFI contract, which will see the government leasing back the planes from the winning consortium.

BAE SYSTEMS UK's largest defence contractor Bid for refuelling aircraft contract with US's Boeing Also benefits from an EADS win, thanks to its 20% stake in Airbus

The final decision to go-ahead with the deal is likely to be delayed by "several months".

The MoD contract is Europe's largest order for air-to-air refuelling aircraft.

It is a big win for Airbus, which will supply civilian planes to be converted into air tankers.

It could also crack open a sector where Boeing has long held a near-monopoly.

Heavy criticism

The European consortium includes Airbus, which is 80%-owned by EADS, UK aeroengine maker Rolls-Royce, inflight refuelling specialists Cobham and France's Thales.

Boeing was grouped with services firm Serco and BAE Systems.

EADS has offered a tanker based on its A-330 commercial jet, while Boeing said it would sell a military version of its 767 jetliner.

BAE will still benefit from the EADS win through its 20% stake in Airbus.

Last week BAE came in for heavy criticism in a National Audit Office report on mounting costs and late delivery of UK defence programmes.

Nearly 90% of the cost overrun was down to four delayed major projects involving BAE Systems.

BAE shares were down 3% or 4.75p at 165.25p, at 1315GMT.