As the European Union makes tentative moves towards a common defence force, BAE's choice cuts to the heart of Britain's entire future military path, given that it is both Washington's closest military ally and an EU member.

In recent weeks the British defence and aviation group has been making what appears to very public moves to court possible mergers on both sides of the Atlantic.

At the weekend a series of newspaper reports suggested that BAE was looking to merge with one of its major US rivals, Boeing or Lockheed Martin.

The reports followed comments by BAE chief executive Mike Turner at a meeting with City of London analysts talking up the company's plans to expand in the United States, either through acquisitions or an alliance.

Then on Monday, BAE's share price surged after the company said it had rejected an informal merger offer from French defence and civil electronics group Thales.

Somewhat embarrassingly for the British firm, its talk of an offer being made over a breakfast in London involving Turner and his Thales counterpart Denis Ranque was rejected out of hand by Thales, although BAE insisted a deal was discussed.

Analysts point to the timing of this flurry of news just before the prestigious Paris Air Show, which begins on Sunday, as a sign that BAE is testing the reaction of both rival companies and governments.

"This kind of rumour always surfaces ahead of air shows like this one," said Robert Jarman of specialist publication Defence News Analysis.

However experts say that for all Britain's status as Washington's closest ally over the war in Iraq, a European tie-up remains the far more likely option.

"I don't think for a minute that a merger with Boeing is possible," said Peter Howard of Jane's Defence Industry, citing US legislation on defence industries as likely obstacle.

Additionally, he said, after a series of mergers and takeovers within the US defence industry, Washington might consider that there is already "not too much left in a way of competition", especially given BAE's existing activities in the US market.

Another major problem of merging with Boeing would be the fact that BAE currently owns a 20-percent stake in European airliner manufacturer Airbus, Bowing's arch-rival.

In contrast, a link-up with Thales was "more likely" because European rules would permit it, Howard said.

Howard said that the British government's recent public disagreements with France and Germany over the Iraq war could be glossed over if BAE looked to Europe for an alliance.

"Industry, being very practical, will go where the money is unless otherwise directed by the government, because they have a responsibility to shareholders," he said.

"In the end the government has to set the tone for its defence policy, and that could mean there is to be closer integration with continental Europe -- it's hard to see it at the moment following the acrimony over the Gulf business but it could happen.

"Geographically, we are a lot closer to continental Europe than to the US."

BAE spokesman Richard Coltart insisted that the firm was "completely committed to Airbus", and said any future deals depended on a number of factors, such as other merger options from Thales.

"It isn't just simply us. Do we go transatlantic or do we stay European?" he said.

"It's really hard to see what will happen next."

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