The Ministry of Defence is refusing to comment on reports BAE Systems has been left off the shortlist for a major defence contract.

According to the Financial Times, France's Thales and Northrop Grumman of the United States have been selected to compete for an �800m deal to build and maintain Watchkeeper unmanned surveillance aircraft.

The two companies were chosen from four original bidders, including Britain's BAE, the FT reports.

But an MoD spokesman accused the newspaper of "engaging in speculation".

Carrier contract

He said the shortlist would not be confirmed until Defence Secretary Geoff Hoon had made an announcement, which could be later this week.

Last month, ministers split a �3bn contract to build two aircraft carriers between BAE and French contractor Thales.

BAE was given the lead role, but the government gave Thales of France a one-third share of the work.

The FT said suggestions that BAE was being excluded from Watchkeeper as a quid pro quo for the carrier deal were denied by MoD officials.

The project is for an unpiloted aerial surveillance vehicle which will provide commanders with imagery from the battle field.

Relations between BAE and the government have been under pressure after cost over-runs estimated at up to �1bn in two earlier defence projects.

The defence giant went over budget in building the Astute submarine and upgrading the Nimrod sea patrol aircraft.

Shares in BAE closed unchanged on Thursday at 113.5p.