The tie-up would have created one of the world's largest defence teams

A merger between the two was "not on the agenda" according to EADS CEO Philippe Camus, a spokeswoman said.

An EADS-Thales merger would have created a firm with sales larger than US rival Boeing.

French President Jacques Chirac was expected to raise the matter in talks with British Prime Minister Tony Blair.

Britain's Ministry of Defence is one of Thales' biggest customers.

Shares in Thales dropped 2.5% at the news, down 0.83 euros to 32.25 euros ($42; �23). Shares in EADS were largely unchanged, up less than 0.2% to 23.66 euros.

German connection

The French government, which holds 15% of EADS, is also thought to have discussed the possible tie-up with the German government, which also has an interest in the group.

It was thought Germany would oppose any EADS-Thales tie-up, as it would have diminished German influence within the company.

A report in the Financial Times on Wednesday suggested EADS, the parent of aircraft maker Airbus, was also interested in buying parts of the UK's BAE Systems.

EADS was reported to be interested in BAE's stake in the four-nation Eurofighter combat jet consortium, and its guided missile and military electronics operations, the newspaper said.

Neither side has commented on the report.