FRANKFURT, Oct 14 Reuters) - German aerospace group DASA and France's Aerospatiale-Matra said on Thursday they planned to merge to create Europe's largest aerospace company and the world's third largest with annual sales of 21 billion euros.

A statement issued by DASA parent DaimlerChrysler AG, in conjunction with key Aerospatiale shareholders Lagardere and the French state, said the merger would be completed in the first half of 2000.

DaimlerChrysler Chief Executive Juergen Schrempp and Lagardere head Jean-Luc Lagardere described the agreement as a ground-breaking deal for consolidation of the European aerospace and defense industry and said it would enhance profitability.

Lagardere said: ``Aerospatiale Matra looks forward to working together as part of the same company.''

Shares in DaimlerChrysler traded up 3.7 percent at 70.40 euros after the news. Aerospatiale was up 6.7 percent at 22.27 euros and Lagardere up seven percent at 42.82 euros ahead of the announcement, before both French shares were suspended.

PAN-EUROPEAN CONSOLIDATION

But shares in British Aerospace, currently Europe's largest aerospace and defence group, dropped nearly five percent to 371 pence on fears that it would now be isolated from mainland European consolidation.

"It's a question of polarization, with France and Germany building a Fortress Europe versus the UK,'' said Zafar Khan, industry analyst at SG Securities.

However, analysts said the Dasa-Aerospatiale move could also be positive, opening the way to a truly pan-European grouping in defense as well as the restructuring of the four-nation civil aircraft consortium Airbus Industrie.

"If there is to be a single European defense company, we now have two big guys to do the negotiating -- Dasa-Aerospatiale and BAe-Marconi -- that will make any kind of end-game much easier,'' Khan said.

The parties said a deal on the merger would be signed on Thursday afternoon in Strasbourg, France, where a news conference has been called for 1500 GMT.

French Prime Minister Lionel Jospin and German Chancellor Gerhard Schroeder are expected to attend.

EUROPEAN AERONAUTIC, DEFENSE AND SPACE COMPANY

The statement said the new company would be known as European Aeronautic, Defense and Space Company (EADS) and would employ over 89,000 people. The deal still required permission from supervisory authorities, the companies noted.

"The new company will be a listed, joint stock company which would give shareholders a unique opportunity to invest in the European aerospace industry,'' the statement said.

Under the merger plan, a holding company would be created to control 60 percent of the new company while the remaining 40 percent would be listed on the stock market, the parties said.

DaimlerChrysler and its French partners -- Lagardere, a French financial institution and the French government -- would each own one half of the holding company.

The French government further planned to reduce its stake in EADS to 15 percent through a secondary offering of shares.

EADS would gain a truly trans-European aspect when it embraces the Spanish aerospace group CASA which is in the process of being merged into DASA.

The companies said the EADS board would be headed by Manfred Bischoff, now head of DASA, and Lagardere chairman Jean-Luc Lagardere. The operative board will also have a German and French head.

The company will have dual headquarters in Munich and Paris and be registered in the Netherlands.

(With additional reporting by Bradley Perrett in London)