UPDATE 2-Former Vivendi boss to run France's Thales
* Jean-Bernard Levy to become Thales CEO
* Levy left Vivendi in June in strategy dispute
* Dassault chief dismisses grand French defence merger
ISTRES, France/PARIS, Dec 19 (Reuters) - Jean-Bernard Levy emerged on Wednesday as the next chief executive of French arms firm Thales, months after a strategy dispute cost him his job as head of media and telecoms group Vivendi.
It is the second shake-up in the French defence industry in as many days, after the nomination of a new leader of key Thales shareholder Dassault Aviation, and ends an unhappy three-year reign for Luc Vigneron whose hiring and firing won him enemies.
On Tuesday, Dassault said Eric Trappier, the head of its international operations, would take over as CEO when Edelstenne reaches retirement age in January.
Despite an outward appearances of a changing of the guard, both moves underscore the enduring influence of outgoing Dassault CEO Charles Edelstenne -- and this could dampen talk of a sudden wave of French arms industry mergers, industry sources said.
"Charles Edelstenne chose his own successor and then anointed the new head of Thales before stepping down. It demonstrates one thing, that Edelstenne is stronger than ever," said a French industry source, asking not to be named.
Edelstenne, who opposes talk of a "France Aerospace" conglomerate, announced Levy's appointment to reporters at a drone demonstration in southern France without waiting for a Thales board meeting at which he is due to be named on Thursday.
Levy stepped down in June as CEO of "World of Warcraft" maker Vivendi over a strategy dispute with the French company's supervisory board.
Edelstenne said the 57-year-old telecoms engineer's first task would be to restore calm to Thales after months of conflict at the maker of warplane radars and air traffic systems.
Only then would Dassault assess the future of Thales together with the French government, which co-operates with Dassault in a shareholder pact.
"It is necessary that he brings calm back into the company and then that he starts working," Edelstenne said.
The French state and Dassault Aviation own 27 and 26 percent of Thales respectively.
"FORGET" GRAND DEFENCE MERGER
Vigneron, whose improvement of the group's profitability was appreciated by analysts, faced attacks on his management and had struggled with the unions after an executive reshuffle in July.
His successor, who went to high school with French President Francois Hollande just outside Paris, is a former aide to conservative politician Gerard Longuet but has managed to avoid being labelled as a member of one political camp or the other.
Levy graduated from France's top engineering school with a bias towards telecoms, but developed and maintained connections in defence after working for the space affiliate of Matra, the missile maker owned by Lagardere that later went on to found Airbus parent EADS.
At Vivendi, he gained experience in deal-making by helping sell assets to reduce debt and buy telecom units in Brazil and Morocco to fuel its subsequent overseas expansion.
But Edelstenne sought to prevent speculation that he would plunge into a grand merger of French aerospace and defence companies, something the industry has chatted about for months.
Laurent Dassault, a member of the family that controls the business-to-combat jet maker, was quoted in October as saying he supported a tie-up between French companies Dassault, Thales, Safran and Zodiac Aerospace.
Without referring specifically to these remarks, Edelstenne told reporters: "I know this idea has come from somewhere. I have a piece of advice for you: Forget it."
Industry sources suggest Dassault opposes Thales merging with the larger Safran unless it can play the controlling role.
Thales shares nonetheless fell 2.4 percent amid uncertainty over the company's direction under the new leadership.
"For the first 18 months, Vigneron remained pretty invisible while there was a lot of rumbling against him. But after a slow start he was beginning to win over investors," said a defence sector analyst who asked not to be identified.
Thales shares had risen 15 percent this year.
Shares in state-controlled aerospace group Safran, many of whose independent shareholders are, according to analysts, sceptical over a merger with Thales, rose 0.7 percent.