The French government's stake in Thales would be reduced to 27.1 percent from 31.3 percent at present but the state would remain the principal shareholder.

Alcatel currently has a 9.5 percent stake in Thales.

Wednesday's announcement made no mention of EADS, the European Aeronautic Defence and Space company, which had also sought to join the space conglomerate.

EADS had wanted to offer its satellite business Astrium to Thales in exchange for a stake of 15.0-20.0 percent.

Thales, in taking over Alcatel's satellite operation, Alcatel Alenia Space, expects to increase its sales in 2006 by more than two billion euros (2.5 billion dollars) or by 20.0 percent from the figure in 2005, the statement said.

French authorities have backed the Alcatel-Thales tie-up in light of commitments from Alcatel to "ensure respect for the state's strategic interests," Thales said.

Alcatel will turn over to Thales its 67 percent holding in Alcatel Alenia Space subsidiary, with the remaining 33 percent controlled by Italy's Finmeccanica.

The new satellite venture would create a European business able to compete with US groups Loral Space, Boeing and Lockheed Martin, which account for about 45.0 percent of the global market for commerical satellites, worth 10.0 billion dollars in 2004.

The transaction now requires the backing of Alcatel's executive board as well as that of Finmeccanica. The alliance will also be submitted to Thales shareholders and personnel and to regulatory bodies.

On the Paris stock exchange Wednesday Alcatel shares were showing a gain of 0.38 percent to 13.12 euros on a generally weaker market.

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