The decision was widely seen as a set-back for GEC, which has close links with the rival bidder for Thomson, the industrial group Alcatel Alsthom. The news sent shares in BAe surging ahead, ending the day 19p higher at 1132.5p, while shares in GEC fell 11.5p to 386.5p.
Chris Avery a leading aerospace analyst from the French banking group Paribas, said: "BAe now has the first seat at the table as the European defence industry consolidates. GEC will have to be invited along later."
The French government said it wanted to conclude the sale of Thomson by the end of the year and pledged to inject Fr11bn (pounds 1.3bn) to rebuild the state-owned company's capital base, a bigger sum than analysts had expected. Thomson has debts of Fr25bn.
Facing repeated questioning at a press conference in Paris, ministers refused to explain why they had chosen Lagadere's strategy or to reveal the value of the rival bids. The offer will now be be scrutinised by European Commission and the government's privatisation commission, set up to oversee the programme of state sell-offs.
As part of the deal, Thomson Multimedia, the group's consumer electronics division, will be sold to Daewoo, the South Korean industrial conglomerate. Within minutes of the announcement hundreds of angry Thomson employees demonstrated outside the Paris headquarters.
The deal would pave the way for a merger of Thomson-CSF, the group's defence arm with sales last year of Fr35bn and after-tax losses of Fr700m, with Lagadere's defence subsidiary, Matra.
Though Lagadere had previously played down the level of British involvement in such a venture during the bidding process, it comes as a clear success for BAe, which is developing a pounds 1bn guided missiles joint venture with the French group.
Sir Dick Evans, BAe's chief executive, has forecast that the European defence sector would have consolidated into two or three key players by the turn of the century following the lead set by contractors in the United States. But he ruled out a merger with GEC for at least 12 months.
However GEC insisted it was not disappointed at the outcome of the Thomson bid battle David Newlands, the finance director, stressed that GEC also had partnerships with Lagadere and Thomson as well as its relationship with Alcatel Alsthom. These include a recently forged joint venture with Thomson to develop sonar equipment with annual sales of pounds 300m. "This announcement merely moves a state company into the private sector. As such it doesn't really rationalise the European defence industry at all," he said.Reuse content