The move was prompted by a wave of public protests that had greeted plans to sell Thomson's consumer electronics business, Thomson Multimedia (TMM), to a Korean conglomerate.
Lagardere, which was chosen as the preferred bidder for Thomson in October, had planned to dispose of TMM to Daewoo Electronics. That would have left it to share Thomson's defence business with BAe, which was prepared to provide financial support for the Lagardere bid and has already merged its missiles business with Matra, a Lagardere subsidiary.
But the move to offload TMM to Daewoo prompted mass anger. Several thousand TMM workers marched last month protesting against the sale to a booming Asian competitor, fearful for their jobs and working conditions.
In a shock announcement yesterday, the French Finance Ministry said its Privatisation Commission "declared itself incapable of giving a favourable opinion to the Lagardere offer, because of the terms of Daewoo Electronics' purchase of Thomson Multimedia".
The move left industrialists, bankers and political observers stupefied, particularly as the French prime minister, Alain Juppe, had defended its choice of buyer for several weeks.
The suspension of the sale comes just days after Mr Juppe's right-wing government gave in to the demands of striking lorry drivers and less than a month after the privatisation of the French bank, CIC was also put off.
The official explanation given at the time was that the bids had not been high enough. But the real reason is thought to have been that there was no acceptable offer by a French bidder, meaning that CIC might have had to be split up and auctioned off to foreign buyers.
The French industry minister, Franck Borotra, said the privatisation of Thomson remained essential for the company. But the decision to suspend the process means that Alcatel, which had been tipped as the most likely winner, may now re-enter the fray.
Alcatel, which had pledged to keep Thomson intact, said it "took note" of the decision. Lagardere said it remained interested in taking over the company. If its bid succeeds, Thomson's missiles and dynamics business, which has sales of pounds 300m-pounds 400m, will be incorporated into the pounds 1bn joint venture formed by Matra and BAe.
Meanwhile there was better news for BAe in the shape of confirmation that it is part of a consortium which has bought the German defence systems company STN Atlas Electronik. BAe is paying pounds 104m for a 49 per cent stake in the business, which will give it access to the German naval market.
The deal will come as a small consolation after BAe lost out to GEC in the battle to take over VSEL, which would have given it a naval systems integration capacity.
"This allows us to extend and enhance our expertise and builds on our systems integration expertise and customer base," said a spokesman. The other members of the consortium are the German groups Rheimetall and Badenwerk.