Invesco Perpetual, which owns 13.3% of the British defence company, issued a long list of objections to the proposed $45bn (£27.9bn) deal.
The fund manager raised concerns over the terms of the deal and the level of state shareholding in the new combined group - which it said would affect its future prospects.
It also warned the merger would have a negative impact on BAE's business in the US, where it undertakes sensitive defence work.
"Invesco believes the merger would materially jeopardize BAE's unique and privileged position in the US defence market, and has been unable to identify any corresponding benefits to offset this.
"Invesco is very concerned that the level of state shareholding in the combined group will heavily impair its commercial prospects and result in governance arrangements driven more by political considerations than shareholder value creation."
It said it would discuss the concerns with BAE's board and other shareholders in the next few days.
The statement comes two days ahead of a stock market imposed deadline for the two companies to set out more detailed terms of the merger.
Defence Secretary Philip Hammond said there was "no chance" of the merger being completed by the deadline and that it would be up to the companies to ask for an extension, according to Reuters.
BAE's shares fell 1.3% in early trading.
The deal requires the approval of the UK, Germany and France - but last week the governments disagreed over the role the state would take in what would be the world's largest aerospace and arms group.
On Sunday, Mr Hammond warned that France and Germany must reduce their stakes in EADS if the UK is going to allow the merger to go ahead.
Mr Hammond said it was a "red line" issue for the UK that Paris and Berlin gave up their ability to control the company.
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