The government has loosened its grip on Sweden's two main defence groups, Saab AB and Celsius to allow them to seek mergers or joint ventures with foreigners.

"Up until the end of the cold war they didn't really have to go international because of procurement from the Swedish state, but military spending has come down quite a lot since then," said Aros defence analyst Per Colleen.

Sweden's defence industry, focused on jet fighters, submarines and missiles, boasts high technology for such a small country but analysts say the two companies need to be part of a larger international group to guarantee their future.

Both have good technology but need better support in promoting their products abroad in a tough market dominated by the US firms, analysts add.

Sweden needs a morecost-efficient defence industry that does not depend solely on orders from the state, defence minister Bjorn Von Sydow said. "We cannot continue the way we did during the Cold War...we can't afford it, we can't do it alone as we did in the past," Von Sydow said in an interview.

During the last couple of years the defence budget has been reduced annually by some four billion crowns ($504.9 million).

"The defence budget is a shrinking percentage of GDP. We are now around 2.4 per cent and some years ago it was around 2.6 to 2.7 per cent," Von Sydow said. Sweden plans more reforms to create less costly armed forces, for example, reducing conscription, he said.

Von Sydow said this meant defence companies could no longer survive on state buying and needed to restructure further to become more international.

While the end of the Cold War has cost Swedish defence companies some of their domestic market, the simultaneous transition to democracy in many other countries means they are no longer off limits toSweden's arms exporters.

Von Sydow sees potential in Latin America, especially Chile, where Saab wants to sell its JAS 39 Gripen fighter, and Brazil.

Asian democracies are another potential market which Von Sydow said was so far not greatly affected by the region's economic problems.

At the same time the government, which argues that a single European corporation for all procurement may be some way off, and that a European solution may not guarantee all its supplies, wants to be sure it can meet its defence needs, he said.

"We want a system in which the strategic supplies available in Sweden will still be there for us," Von Sydow said. The strategic sectors include air defence, underwater defence and information technology.

"We are giving the signal to our industry -- you come up with the business ideas and we will scrutinise them from our national defence supply point of view," Von Sydow said.

To allow the companies to restructure, the government has reduced its role in the partly privatiseddefence technology group Celsius and aerospace and defence group Saab.

It gave the go-ahead for Europe's largest defence group BAe (British Aerospace) to take a 35-per cent stake in Saab, whose first-half profit after financial items rose to 475 million from 177 million crowns on sales of 3.92 billion after 4.64 billion.

Celsius, which posted first-half profit after financial items of 270 million crowns against 157 million, expects its full-year profit to exceed 500 million crowns. Sales rose 15 per cent for the first half to 5.99 billion crowns.

Last month Celsius announced a joint venture with Germany's Daimler-Benz AG's Dasa to develop, market and produce the air-to-surface missile Taurus. More cooperation may follow.

"As we are now in one important relationship, it would of course also be very logical to discuss other things, but there is nothing concrete in that," Celsius chief executive Lars Josefsson said.

The state owns 25 per cent of Celsius, controlling 62 per cent of the votes. Industryand commerce minister Anders Sundstrom said in July that the government may sell its stake if Celsius joined the planned European Aerospace and Defence Company (EADC).

France, Britain, Germany are among six European governments which have said they want to see a single, private aerospace and defence company formed out of the fragmented European industry.

This could compete better with the US industry, which has been consolidating since the early 1990s.

Celsius, part of a consortium bidding for a stake in state-run Australian Defence Industries, also recently announced a technical cooperation deal with the French state-owned submarine maker DCN for its next-generation submarines.