Westland is to link up with Agusta, a division of the Italian industrial group Finmeccanica, in a 50-50 joint venture. David Wright, an executive director of GKN, will become the chairman.
The deal is likely to delight Michael Heseltine, who first tried to combine Westland with a European group when he was defence secretary in the mid-1980s. Mr Heseltine resigned after the plan was blocked by the then prime minister, Margaret Thatcher, who favoured a US rescue.
GKN yesterday stressed that far from being a rescue, Westland and Agusta would form the second largest helicopter manufacturer in the world.
"Together they will form one of the world's premier helicopter companies with a broad range of civil and defence products, a strong order book and an exciting programme of new products and technologies," it said in a statement with Finmeccanica.
The deal marks another step forward in the consolidation of the defence and aerospace industries, leaving Europe with just two helicopter manufacturers - Westland/Agusta and Eurocopter, a consortium led by the French group Aerospatiale.
Mr Wright said further European deals could be in the offing. He declined to rule out a tie-up with Eurocopter - a move that would put Boeing, the world's biggest helicopter maker, on the back foot.
Executives have taken nearly a year to thrash out details of the deal after announcing the plan in April last year. Yesterday they named Amedeo Caporaletti, president of Agusta, as chief executive. Richard Case, the chief executive of Westland, will be managing director.
More than 4,800 staff will be transferred to the new company, which already has an order book of pounds 6.3bn. A surge in new orders led the group to recruit 500 staff in the last year.
The companies have already worked together to develop the EH101, a three- engined, 15-tonne helicopter used by the Royal Navy. A total of 98 EH101s have been ordered by the Royal Air Force, the Italian Navy, the Canadian Armed Forces and a customer in Japan.
Analysts welcomed the deal but said more consolidation was needed. "There are still too many [helicopter groups] across the world," said one.