UDI generated annual sales of $2.3bn in 2004

BAE said the purchase would enable it to strengthen its presence in the US defence market, where it made five smaller acquisitions in 2004.

UDI makes combat vehicles, including the Bradley Fighting Vehicle, and munitions, as well as carrying out naval ship repairs.

UDI employs about 8,000 people in 25 locations in the US and Sweden.

We are delighted to be where we are this morning BAE chief executive Mike Turner Check the BAE share price

BAE said it would pay $75 a share for the US firm and fund the deal through a new $3bn debt facility, internal resources and the placing of £375m ($715m) in shares.

"The combined business creates a leading international position in the fast growing land systems sector," BAE said in a statement.

"As a result of the global war on terror and ongoing operations in Iraq and Afghanistan, the US Department of Defense has significantly shifted its priorities and budget towards land systems," it added.

UDI, which also designs artillery systems, missile launchers and naval guns, generated annual sales of $2.3bn in 2004.

'Significant step'

BAE is the UK's largest defence group and owns a stake in aircraft firm Airbus. It is taking part in the production of the new Eurofighter aircraft.

"We are delighted to be where we are this morning," said BAE chief executive Mike Turner.

"Clearly it is a very significant step in our strategy to be the major transatlantic defence company."

He said by acquiring a firm making combat vehicles BAE was "accessing one of the growing areas of the US defence budget".

"There is real momentum in this sector at the moment."

US growth

Mr Turner said that the US Department of Defense would now be BAE's biggest customer, a position previously occupied by the UK's Ministry of Defence.

The firm added that North America would now account for a third of its profits - against a quarter previously.

BAE's group finance director George Rose said UDI had a good record of revenue growth, and of converting operating profits into cash flow.

Mr Rose added that the deal was expected to be completed by the middle of the year and that there were no regulatory issues expected.

BAE's US purchases last year included defence technology firm DigitalNet for $520m, helping it to become one of the top providers of IT system support to government agencies there.

Shares in BAE closed down 1.7% at 245.75 pence on Monday.