Hammond said the UK government was prepared to use its “golden share” in BAE – Britain’s largest defence contractor – to veto a deal unless Paris and Berlin gave up their ability to control Airbus manufacturer EADS.
He said: “We have made very clear that we do have red lines around the BAE-EADS merger and that if they can’t be satisfied, then we will use our special share to veto the deal.
“It is not, I think, necessary to have no French or German interest in the company. It is necessary to reduce that stake below the level at which it can control or direct the way the company acts.”
Hammond added: “We want to see this company – and I think the management wants to see this company – prospering as a commercial business focused on doing the things that are right for the business, not being beholden to or controlled by any one government.”
Meanwhile, the Chancellor said that any merger between the two companies must make sure that British national security and jobs are preserved.
Speaking as the Conservatives gathered in Birmingham for the party’s conference, George Osborne said: “Our approach to this has been to make it very clear that our priorities are of course the national security of the United Kingdom [and] jobs and investment in the UK.
“Those are the tests against which we are judging the proposal brought to us by these two companies.”
BAE owns dockyards at Govan and Scotstoun north of the Border, while EADS has Airbus sites at Filton near Bristol and Broughton in Wales. The two companies have until Wednesday to confirm whether they will go ahead with the merger.
Tensions over the tie-up have spilled into the open in recent days as Britain, France and Germany jockey over the role of the state in what would be the world’s largest aerospace and defence group.
A source close to the talks said one of the points under dispute was where the new group would be based. The German government would like an important part of the company, or even its headquarters, to be based in Germany, the source said.
Nick Hood, head of external affairs at research firm Company Watch, said the merger could see contract opportunities for BAE’s 7.500 suppliers in the UK “migrate” to European rivals that already supply EADS.
He added: “The defence sector is not just strategically important, but a key component of the UK economy and one vital to achieving the growth that the government, economists and commentators alike recognise as being essential to reducing the deficit and bringing an end to the painful austerity, which is affecting so many individuals and businesses.
“The merger of BAE and EADS may have the unexpected side-effect of threatening not just supply companies and their employees, but the UK’s climb out of the double-dip recession. This is no time to play with the fate of 7,500 UK suppliers and their 52,000 employees.”