GKN Aerospace in Yeovil, Somerset, which makes airframes for Royal Navy helicopters, said the potential loss of the contact puts 230 jobs at risk.
Leonardo, which assembles the Wildcat helicopter in the town, has told GKN it plans to take production in-house.
The firm said the current arrangement was "no longer sustainable".
The union Unite said it was a "massive blow".
GKN has begun formal consultations with the unions regarding potential job losses in Yeovil.
The firm said in a statement that the move by Leonardo "puts at risk the long term viability of our Yeovil site".
GKN added: "Having completed a thorough assessment of the business, we have regrettably concluded that GKN Yeovil, as it stands today, is no longer a sustainable business and will have to be significantly downsized or fully closed.
"We will now enter a period of consultation with nominated employee representatives."
Andy Soughton of the Unite union said talk of a potential site closure was a "bit of a shock".
"We've had quite a few redundancies over the years, and work has dropped off a little bit," he said.
"So I think people were expecting something to happen. But not a closure."
More than 250 jobs were lost at GKN's car manufacturing branch in Telford in Shropshire in August.
Hundreds of aerospace jobs could be lost if a factory is forced to "significantly downsize" or close, it has been claimed.