* Europe seen lagging U.S., Israel on drones
* EU defence arm begins preparatory work
* Eight EU states launch investment programme
BRUSSELS, Nov 19 (Reuters) - European states took a first step on Tuesday towards developing a drone that could challenge U.S. dominance of the unmanned aircraft sector.
Defence ministers meeting in Brussels instructed the European Defence Agency (EDA), the European Union's defence arm, to start studying the military requirements and costs of a future EU surveillance drone that could be produced after 2020.
The United States has used drones to kill suspected militants in countries such as Yemen, Afghanistan and Pakistan, causing intense controversy about sovereignty and civilian casualties. But drones also have a wide range of civilian uses, including border control, fire fighting and disaster monitoring.
A factsheet from EDA, which groups all 28 EU states apart from Denmark, said "beyond 2020" seemed a reasonable timeframe to produce a European medium altitude, long endurance drone.
"This is the starting pistol for us to be able to start work on a European RPAS (remotely piloted aircraft system) project," EDA Capabilities Director Peter Round told a news conference.
Eight European countries, including Britain, France, Germany, Italy and Spain, signed an agreement to invest jointly in research into various drone components, including collision avoidance technology and automatic take-off and landing.
The United States and Israel are leaders in the drone market and some European government fear being left behind. Military operations in Libya and Mali have highlighted a shortage of European reconnaissance capacity.
Britain operates Reaper drones, built by privately owned U.S. firm General Atomics, and France has also ordered Reapers.
Three European aerospace companies - France's Dassault Aviation, EADS Cassidian and Italy's Finmeccanica Alenia Aermacchi - called on Europe in June to launch a drone programme.
The EU's executive Commission said in July it would help fund prototypes of some technologies, such as drones.
EU leaders are trying to promote European cooperation in four key defence-related areas in the run-up to the bloc's December summit which will have a defence focus.
Apart from drones, the other areas are increasing air-to-air refuelling capacity, government satellite communications and working together more closely on cyber defence.
Summit preparations hit a setback when defence ministers failed to agree on a set of conclusions from their meeting.
A proposal to offer tax incentives to promote cooperative defence projects was opposed by finance ministers keen to protect tax revenues, an EU source said.
A reference to a more balanced development of the defence industry across EU member states was resisted by some governments with large defence industries who feared they might have to give more work to smaller countries, the source said.
(Editing by Robin Pomeroy)