Defense giant BAE Systems PLC's (BA.LN) shares rose Tuesday to their highest level since May 2011 on relief that planned cuts in U.S. defense spending as part of President Barack Obama's new budget announced Monday weren't as deep as investors had feared.

The U.K. defense company's stock closed up 2.9% at 329 pence, outperforming London's benchmark FTSE 100 index which was down 0.1%.

For the fiscal year that begins Oct. 1, President Obama is seeking $525.4 billion for the basic operations of the Defense Department, plus $88.4 billion to support troops in Afghanistan. The proposal is $6 billion lower than the 2012 base budget of $531 billion, approved by Congress, which was a cut of $22 billion from the administration's proposal for the current year.

"The budget has offered a little bit of relief [as] the market would have been expecting worse. The cuts could have been more severe," said Roger Johnston analyst at London brokerage Edison Investment Research.

But an official at another U.K. defense company warned uncertainty over defense spending by the U.K. and U.S. governments continues to hang over U.K. contractors even if there were no unpleasant surprises in the U.S. budget announcement.

BAE Systems declined to comment.

The group, which derived 29% of half-year sales from its U.S. platforms and services division, reports full-year results Thursday. BAE Systems is expected to report earnings before interest, taxes, and amortization of GBP2 billion compared with GBP2.13 billion in 2010.

BAE's order book is expected to show the impact of defense spending cuts in the U.K. and the U.S. which have thrown the defense group's growth strategy off course.

The U.S. government envisions shrinking military spending by $487 billion over 10 years, representing a cut of about 8% a year, according to Pentagon figures.

In the U.K., the government plans to offset a GBP38-billion hole in its defense budget with a 7.5% cut in Ministry of Defence yearly spending to save GBP10 billion over four years.

Shares in other U.K. defense contractors with business in the U.S. were also higher Tuesday. Shares in Meggitt PLC closed up 1.9% at 372p Tuesday.

-By Mark Shapland, Dow Jones Newswires; +44 207 8429358; mark.shapland@dowjones.com