According to an "agreement reached regarding the state's participation in KNDS", this stake is to start at 40 percent and then be reduced to 30 percent within "two to three years", a source said.

KNDS is currently effectively controlled by the French state, as it is part-owned by French public holding company GIAT Industries, with Germany's Wegmann family owning the other part.

The company had been planning an initial public offering, at a time when defence stocks are booming with Europe racing to re-arm.

The German government had said it was examining an investment in the group, in a bid to gain more influence over it.

Under the agreement, Germany will obtain the same rights as the French state, including after its stake is lowered, the source said.

France is meanwhile to reduce its own stake "insofar as possible", they added.

Germany will buy shares at the initial public offering price.

KNDS is a key supplier to both the German and French militaries, making equipment including Leopard 2 battle tanks and Caesar howitzers.

It was created in 2015 through a merger of France's Nexter and Germany's Krauss-Maffei Wegmann.

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KNDS