Shares in BAE Systems PLC (LSE:BA.) and other London-listed defence companies were in the red after the European Union agreed to launch a €150 billion defence funding scheme, but with UK firms locked out until final terms are agreed on a new security pact.
London and Brussels signed a new post-Brexit reset deal on Monday, including a security partnership that leaves the door open to UK defence companies joining the joint procurement scheme
The 'loans for arms' fund allows countries in the bloc to borrow from a central Brussels funding pot to buy weapons through joint procurement.
It was proposed by the European Commission in March to help the continent re-arm after the US said Europe needed to boost its spending on defence, with components from non-European firms limited to a maximum of 35% of any contract.
Monday saw the scheme gain approval from the bloc's capitals, the Financial Times reported, with formal agreement set for on Wednesday.
Defence was one of the core elements of a UK-EU "strategic partnership" agreed on Mondayt, aimed at resetting the relationship between the two sides of the Channel post-Brexit.
An announcement on security, agri-food exports, fishing and migration was announced on Monday.
Starmer said the pact was a "win-win" deal, while European Council president António Costa said the pact showed the EU and UK were "guardians of global stability," and would "strengthen Europe's contribution to NATO".
** Update: Adds details of UK-EU pact **