The news sent shock waves through the City, where pounds 325m was wiped off BAe's stock market value as its shares fell to an all- time low of 103p before recovering slightly to close at 113p, after beginning the day at 199p.
Last night, in a further blow to the company, the debt rating agency, Moody's, said that it had put dollars 1.5bn ( pounds 890m) worth of BAe debt under review for a possible downgrading.
In an attempt to stem the haemorrhaging, BAe announced that it is setting pounds 1bn aside to cover a rationalisation of its loss- making regional aircraft division and selling a 50 per cent stake in its regional jet business, which makes the BAe146 'whispering' jet, to Taiwan.
The rationalisation will involve closure of the Hatfield plant in Hertfordshire with 2,000 job losses, a further 1,000 redundancies in Manchester and the transfer of production of the Advanced Turbo Prop aircraft to Prestwick in Scotland.
Although the company also announced yesterday a reduced interim dividend of 3p, the payment will be delayed because BAe does not have sufficient distributable reserves.
To overcome this, the company is proposing a capital reduction that will require court approval and the support of BAe's shareholders at an extraordinary meeting next month.
John Cahill, BAe's new chairman, said yesterday that the rationalisation programme was 'the best way forward'.
Analysts were left unimpressed, however. One said: 'There are too many unanswered questions and too many uncertainties and the scale of the losses is quite staggering.'
The pounds 296m profit from BAe's defence business in the first half was more than wiped out by a pounds 286m loss on commercial aircraft and a pounds 31m deficit at its Rover cars subsidiary.
More than half the pounds 278m loss in its regional aircraft division and a large part of the pounds 320m cash outflow it suffered was accounted for by the 146 programme.
The Taiwan Aerospace Corporation will pay about pounds 120m for a half share in the regional jet business. BAe estimated that the potential savings from the rationalisation could reach pounds 200m a year through site closures, staff reductions and the transfer of assembly and component work to Taiwan.
BAe hopes to reach agreement on the joint venture with Taiwan Aerospace by the start of next year. It hopes the deal will lead to production of 35 regional jets a year, a third of which would be assembled in Taiwan.
Mr Cahill also disclosed that BAe was seeking to cut costs on its turboprop aircraft business, possibly through another joint venture with a rival manufacturer. BAe's turboprop business lost pounds 111m in the first half.
The net provision will amount to pounds 750m after deduction of a deferred tax credit of pounds 250m and will cover forecast losses on regional aircraft in the second half, redundancy costs and BAe's leasing liabilities. Of the 223 BAe146s that BAe has already delivered, 101 are on lease.
Dick Evans, BAe's chief executive, said it had decided to back a joint venture with the Taiwanese on regional jets because of Taiwan's financial strength, keenness to enter the commercial aircraft industry and ability to sell into Pacific rim countries - the world's fastest-growing aviation market.
Mr Evans also said he was confident that the European Fighter Aircraft would proceed, even if BAe had to take it on as a 'go-it- alone' programme.
Meanwhile, Rover, which reduced its first-half losses from pounds 43m last year to pounds 31m, was well- positioned to benefit when the depressed UK car market began to pick up, he said.
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