The collapse of the EADS/BAE Systems tie-up is a major setback for Europe but shrinking defence budgets will continue to drive the need for sector consolidation and burden sharing, analysts said.

The $45 billion EADS/BAE deal would have created the world's biggest defence group, spanning the globe and more than a match for US giant Boeing, but it failed when Germany could not agree what share it would have alongside Britain and France in the new entity.

"It is not a good sign for Europe's defence industry because the three countries that really count could not find a way to agree," said Jean-Pierre Maulny, deputy director of the Institute for Strategic and International Relations in Paris.

"Such a merger would have been a demonstration of the shared ambition of the three countries, with a spillover on European defence and security policy," said Jan Techau, director of the Carnegie Europe think-tank.

"With the failure, the opposite is demonstrated," Techau said.

It is a "political sign that tells us the three countries don't really want to work together on security and defence policy."

The failure of the deal comes as the United States and its NATO allies grapple with the increasingly difficult problem of how to maintain military spending when governments are under pressure on all sides to cut budgets.

NATO has adopted a 'Smart Defence' policy, aiming to promote increased cooperation and burden sharing to offset reduced funding, with European countries meanwhile touting the merits of 'Pooling and Sharing' resources.

If the principle is clear, implementation is fraught with difficulties since no country wants to give up sovereignty over the life and death issues ultimately involved in national defence.

Germany's reluctance to back the EADS/BAE tie-up was apparently based on its fear that the civil aerospace activities would be concentrated around Airbus in Toulouse, southern France, with defence grouped in Britain.

"Im ready to admit that we never expected to face such opposition against the deal, in particular not in Berlin," EADS chief executive Tom Enders said.

Enders noted especially the "strong efforts by the French and UK governments" to overcome what proved in the end to be "insurmountable" hurdles.

Britain, France and Germany had agreed to base their defence strategy on a European arms industry and "with the failure of the deal, a great opportunity has been missed," said Christian Moelling, specialist with the SWP think-tank in Berlin.

"However, the pressures driving consolidation in the arms industry will continue ... the sector is inevitably going to have to be restructured," Moelling said.

The figures highlight Europe's problem, with defence spending averaging 1.6 percent of gross domestic product, compared with 5.0 percent for the United States -- a sore point in Washington which constantly presses its allies to do more.

Worse still, in the US view, is that European Union spending actually fell to 180 billion euros ($234 billion) in 2011 from 200 billion euros five years earlier and could slide further as governments seek further cuts.

"What we can hope for is that this failure is going to make people think again and that other groups will be encouraged to join forces, especially in the most fragmented sectors such as land and sea defence," an industry source said.