The announcement came on the eve of president Jacques Chirac's state visit to Britain today and marks a further stage in Anglo-French defence co-operation following GEC Marconi's link-up on sonars with Thomson.
BAe is to pool its own missiles division, BAe Dynamics, with those of Matra to create Europe's biggest missile supplier with combined sales of pounds 1bn a year and 6,000 employees. The new grouping will provide a powerful European competitor to US groups such as Lockheed Martin which merged last year.
France's Aerospatiale and DaimlerBenz Aerospace of Germany combined their missile businesses six months ago.
As part of the deal BAe has also agreed to "support" plans by Matra's parent company, Lagadere, to acquire a majority shareholding when Thomson- CSF is privatised.
A BAe spokesman said this could involve financial backing. BAe's interest is in combining some of Thomson-CSF's missile operations into the new Anglo-French joint venture with Matra.
The new company, to be called Matra BAe Dynamics, will be owned 50:50 and will have a British chairman and a French chief executive. It will be registered in France.
BAe is to pay the joint company pounds 50m to pounds 110m over the next four years dependent on the level of orders it captures. The payment reflects the slightly larger size of Matra Hachette which accounts for about 60 per cent of the combined turnover.
BAe's dynamics business is based in Stevenage, Bristol and Lostock near Bolton and employs just under 3,000 people. Matra employs a further 3,000 in France.
The two companies are already teamed on the Casom project - a air-launched cruise missile flying at just under the speed of sound with a range of 250 km - for the Ministry of Defence. The missile is known as the Storm Shadow, and is a variant of Matra's Apache.
Matra and BAe are also partners in the consortium supplying the Future Medium-Range Air-to-Air Missile, called the Meteor, for the Eurofighter. The Meteor is a ramjet-powered missile, flying at three to four times the speed of sound and able to destroy enemy planes at 50 miles. The contract may be worth up to pounds 900m.
BAe's product range includes the Rapier ground to air missile, the Trigat anti-tank missile and the Asram advanced short-range air-to-air missile being supplied to the MoD. It also makes two naval missiles - the Sea Wolf which is used to arm Royal Navy frigates and the Sea Skua anti-ship missile.
The Matra range includes the Mica family of air-to-air missiles, the Apache air-to-ground missile, the Mistrale surface-to-air missile and the Milas torpedo.
The two companies have been negotiating a merger of their missile businesses for nearly two years and the deal still needs UK and French government and regulatory approval. Provided that is forthcoming it will be the first of the European defence alliances that BAe chief executive Dick Evans has been seeking.