A BAE spokesman confirmed to The Times yesterday that a merger of its three shipyards with those of VT Group, Babcock International Group and Swan Hunter was an option.

But he emphasised that no government approval had been received.

The spokesman said: “To suggest that there’s already an agreement to merge all the shipyards is premature.

“It’s a possible outcome but I very much doubt that you could merge all the shipyards . . . but there may be some individual alliances.”

The Government is holding a warship summit on October 11 with leading defence and shipbuilding companies to determine how a strategy to ensure the sustainability of the industry in Britain can be achieved.

Both Babcock, the listed engineering company that owns a shipyard at Rosyth, and VT, which has operations in Portsmouth, have expressed interest in working together more closely. Swan Hunter’s shipyard is at Wallsend.

But Gordon Campbell, Babcock’s chairman, issued a warning that it would be “very difficult to agree valuations” in the event of a merger proposal.

BAE has been investigating ways of turning around the performance of its loss-making shipyards, whose principal customer is the Royal Navy. It even floated a plan to sell the shipyards, but it came to nothing for a combination of commercial and political reasons.

BAE and its rivals are concerned that a glut of large defence programmes may be followed by a drought that could jeopardise the UK’s shipbuilding capability.

BAE’s three shipyards are Govan and Scotstoun on the Clyde, and Barrow-in-Furness. They are not expected to move into profit until well into 2008 at the earliest despite an annual turnover of up to £750 million.

Mike Turner, BAE chief executive, has said he hoped to resolve the shipyards issue by November, when the company’s annual strategic review is completed.

Shipbuilders and marine engineering companies, including BAE, Thales, the French group, VT, Swan Hunter and Rolls-Royce, are expected to attend the summit at the Defence Procurement Agency, which commissions equipment necessary for the Armed Forces.

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