About 75 per cent of the Defence Evaluation and Research Agency is to be sold as a private sector company in the next year, creating two new organisations.
The Ministry of Defence chemical and biological laboratories at Porton Down, Wiltshire, and departments such as the Centre for Defence Analysis will remain in the public sector.
It is expected that two-thirds of Dera's 12,000 staff will join the privatised company.
Defence secretary Geoffrey Hoon said the move would stimulate the exploitation of science in the wider UK economy and strengthen links between civil and defence technology.