Under the ATR agreement, BAe will end production of its loss-making Jetstream 61 aircraft, forcing the company to make a £250m provision to cover restructuring and the loss of about 1,000 jobs.
The deal covers BAe's Avro and Jetstream aircraft operations, and initially involves the merger of marketing, sales and customer services in a joint venture in which the partners will have equal shares.
ATR, which is made up of France's Aerospatiale and Italy's Alenia, and BAe's Avro and Jetstream businesses will retain individual responsibility for finances and industrial development.
However, the partnership - dubbed "Minibus'' after the Airbus venture - will study how best to achieve greater industrial integration and development of new products.
BAe said the partnership was just the start, as it was talking to other companies about joining, including Indonesia Aerospace, Saab-Scania and the state-owned Spanish group Casa.
Andy Wrathall, BAe spokesman, said: "This will affect the whole European regional aircraft industry and beyond. It is not meant to be a static venture - it is designed to be added to, and we welcome continued dialogue with manufacturers."
Daimler-Benz Aerospace, whose Fokker division held merger talks with BAe and which stands to lose most from the ATR agreement, said the deal offered no solution to problems in the industry. A spokesman said: "Today's agreement is based on marketing and not a reduction of industrial capacity, because there is hardly any overlap between their products.
"We want to go further and reach an industrial alliance. A purely European solution will not be enough to ensure a lasting future for the industry in Europe."
Dick Evans, BAe chief executive, said: "This deal is a great day for the European aerospace industry. Although the regional aircraft market remains very difficult, we will be able collectively to strengthen our performance and to drive down costs."
Analysts welcomed the agreement. BAe's shares put on 1p to 473p after rising strongly in advance of the deal.
Jetstream 61 duplicates ATR's own aircraft in the 64- and 72-seater range. It is produced at a plant at Prestwick in Scotland, where 2,000 staff work. The successful 30-seat Jetstream 41 aircraft is also made there.
Mike Turner, head of BAe's commercial aircraft division, said the company expected gradually to reduce its sales, marketing and support workforce of some 850 in the regional aircraft business by about 400. At Chadderton, near Manchester, about 550 jobs will go from the current workforce of 2,400.
Mr Turner said that the ATR venture would involve a combined sales, marketing and support staff of about 900, of whom BAe would supply about half.
The venture's headquarters will be located in Toulouse, where Aerospatiale is based.
BAe accompanied the news with a profit forecast for 1994 of £185m, against £71m last time, excluding exceptionals. The final dividend would be not less than 6p, up from 5p last year, making a forecast total dividend of not less than 10p (8.3p). The provisions will be taken as a £215m exceptional item in the 1994 accounts, and £35m in those for 1995.