BAE Systems says Airbus faces a challenging future A380 test flight

If shareholders agree to the deal, pan-European EADS - which owns 80% of Airbus - will own the firm outright.

The 13,000 Airbus workers in the UK, where the planes' wings are built, are not thought to be affected by the deal.

"The board believes that Airbus is facing a challenging short to medium-term outlook," BAE said.

BAE can sell its 20% stake after a 2001 deal it signed with Franco-German EADS.

It estimates the sale of the stake - which has to be approved by BAE shareholders - will generate net proceeds of about £1.2bn. It will then return about £500m to shareholders.

Airbus troubles

BAE first said in April this year that it was thinking of selling its stake in Airbus.

After BAE and EADS failed to reach agreement on a price for the sale, investment bank Rothschild was brought in to value the stake.

Its estimate of the stake's value at about £1.9bn was much lower than analysts' expectations of £3bn-£4bn.

Airbus has had a difficult year, announcing in June that deliveries of its new A380 plane would be delayed following problems with wiring.

In a statement, BAE said it thought "a significant amount of management focus, time and investment would be required to address the issues currently facing Airbus".

BAE chief executive Mike Turner told the BBC that the time was right to sell.

"In the long term Airbus will do very well. Cleary it has issues today but I see them as quite temporary," he said.

"It needs to keep costs down because of the weakness of the dollar and has got to find money to invest in the new family of aircraft. Also Boeing has re-entered the market with a vengeance and a very good product."

EADS co-chief executive Louis Gallois said BAE's comments had come as no surprise.