French telecom technology provider Alcatel ' Lucent Technologies of the United States announced on Friday that they were in talks to merge.

That was followed by press reports on Monday, ' information from a French source close to the matter on Wednesday, that the French government had encouraged Alcatel to contribute its satellite activities to Thales.

This fits a long-st'ing policy by the French government to try to consolidate European defence-related industries.

Alcatel has offered to sell its military satellite ' security systems, worth an estimated 1.8 billion euros (2.2 billion dollars), to Thales in return for about 25.0 percent of Thales shares from 9.5 percent now.

Other sources close to European defence ' aerospace giant EADS also said that EADS wanted to be part of this consolidation in the civil ' military satellite sector ' was ready to contribute its own satellite division.

Separately, German Chancellor Angela Merkel ' French President Jacques Chirac reportedly approved an alliance of EADS ' Thales during a meeting in Berlin last week.

Alcatel ' Lucent were holding board meetings on Thursday.

All three European companies are already partners in the consortium that in January signed a contract on the first phase of the European satellite navigation system Galileo.

A source close to the Alcatel-Thales talks said that the French government, which owns 31.3 percent of Thales, is hoping that a deal between the two companies would prevent Alcatel's strategically important satellite operations from falling into US h's.

A tie-up with the manufacturer of military electronics would also benefit Alcatel because it would force the French government to defend it in the event of a hostile takeover bid from a foreign company.

EADS has a satellite business called Astrium ' Alcatel has a space division called Alcatel Alenia Space. These are about the same size -- both have a turnover of around 1.7 billion euros -- ' each has its own strategic advantages.

Astrium benefits from other space activities owned by EADS: its satellite rocket launcher Ariane-5. ' Alcatel, best known for its telecommunications networks, is the biggest maker of military ' civilian satellites in Europe, ' the third biggest in the world.

The two European companies account for around a third of the market. American heavyweights Loral Space, Boeing ' Lockheed Martin account for around 45 percent of the global commercial satellite business, worth 10.2 billion dollars in 2004, according to specialist publication The Space Review.

A French state holding company owns about 30 percent of the Aeronautic Defence ' Space Company (EADS), German auto group DaimlerChrysler owns about 30 percent, the Spanish government 5.0 percent ' miscellaneous shareholders the rest.

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