An agreement with ATR would almost certainly mean BAe ending production of the Jetstream 61 aircraft at Prestwick in Scotland, incurring job losses and heavy restructuring costs of up to £200m.
Sources said the deal was also likely to incorporate BAe's Avro regional jets business, which it tried unsuccessfully to put into a joint venture with Taiwan Aerospace.
A spokesman said BAe was in advanced negotiations with ATR's state-owned parent companies, Aerospatiale and Alenia, and that the talks were continuing in Paris yesterday. The companies had been negotiating "on and off" for several months.
Sources said that initially the three companies would pool marketing, sales and support operations. But as the partnership was strengthened, final assembly of aircraft was likely to be rationalised and new aircraft might be designed jointly.
That would make the venture similar to the Airbus consortium - where BAe already works closely with Aerospatiale - with each of the partners contributing large aero-structures to a common final assembly line.
The BAe spokesman would not put a time scale on a likely announcement, but said there would be reason to wait until BAe's profit figures were published on 1 March. In Rome, an Alenia spokesman denied that a merger was close to being agreed.
A deal with ATR would herald a much-needed restructuring of Europe's ailing regional aircraft makers, which have faced decline in the important US market and the entry of Asian countries into the relatively low-technology turbo-prop business.
Sources said that BAe was continuing talks with Saab Scania about the Swedish company joining the trilateral venture at a later date - a move that would put intense pressure on Daimler-Benz's Fokker.
"Saab's 50-seater aircraft would fit very nicely into the family of planes ATR makes," one analyst said.
BAe said yesterday that it had not ruled out a manufacturer from the Asia-Pacific region joining the group, though "that was something to be considered further down the line".
It is estimated that BAe's regional aircraft operation has been losing between £150m and £200m, due largely to the advanced turbo-prop Jetstream 61. This aircraft faces competition from ATR's 70-seater aircraft and from a 60-seater craft made by Saab andFokker. BAe's Jetstream 41 is secure, with a two-year order book.
Although Jetstream 61 production has been wound down, there has been speculation that BAe kept open the plant to put pressure on ATR to agree to a deal.
A merger would ease the closure threat to the 2,000 employees in the Jetstream operation at Prestwick, but there would still be rationalisation. Jobs could also be affected at BAe's fabrication site at Woodford, Manchester.
One BAe broker yesterday estimated that ending Jetstream 61 production would cost BAe about £200m. "But the merger will lead to a substantial reduction in BAe losses, with the prospect of profits within five years," he said.
BAe made provisions in 1992 and 1993 totalling £1.25bn to cover restructuring of the regional jets business. The deal would ease BAe's financial pressures long-term, and strengthen its hand in the current battle with GEC for control of VSEL, the Trident submarine maker.
ATR is the world leader in turbo-prop aircraft, with more than 400 sold. But turbo-props use relatively cheap technology and have provided entry to the aerospace industry for companies in Brazil, Indonesia and elsewhere. Saab, which needs to produce 50 planes a year to break even, is thought to have made just 15 last year.
The crisis in the industry was underlined yesterday with reports that Fokker was expected to record a loss of DM300m-DM400m (£128m-£170m) in 1995, with a further loss in 1996.