* A UAE deal would underpin thousands of British jobs
* BAE shares biggest faller in benchmark index
* Fierce competition for Gulf deals as global market shrinks
* Not all analysts see UAE news as major setback
(Recasts, adds further analyst comments, background)
LONDON, Dec 20 (Reuters) - BAE Systems faced investor worries over its growth prospects after the United Arab Emirates pulled out of talks to buy 60 Eurofighter Typhoon combat jets, in a blow to the UK government which had pushed hard to land the $9.8 billion deal.
The decision could boost the prospects of French company Dassault Aviation, which sells the rival Rafale plane, although that company has also suffered setbacks in a long-running and unpredictable UAE fighter contest.
The Eurofighter snub punctures Britain's hopes of a deal underpinning thousands of jobs after Prime Minister David Cameron travelled to the UAE last month to lobby for the Eurofighter Typhoon contract, which BAE had said could be a "major game-changer".
However, BAE said in a statement it had not factored the contract into its business plans.
Shares in Europe's biggest defence firm fell 4.8 percent on Friday, making BAE the biggest faller in Britain's blue-chip FTSE 100 index. The announcement came after the market close on Thursday, when they had finished up 1.8 percent.
Fighter jet exports to regions such as the Middle East have become increasingly important to defence contractors such as BAE which are facing declining military spending from their biggest customers in the United States and Europe.
The UAE's decision to abandon the talks was the second upset in the global fighter market in as many days after Brazil rejected offers from the United States and France and opted for Sweden's smaller but cheaper Gripen fighter.
Investec analyst Chris Dyett said the UAE deal had been one of the largest available to BAE, which negotiates in the Middle East on behalf of other Eurofighter consortium partners EADS and Italy's Finmeccanica.
"It's going to be difficult for this company to grow," he said when asked about the impact on BAE of the UAE decision.
Analysts at JP Morgan Cazenove called it a major setback for BAE Systems, noting the contract could have been worth around 45 pence per BAE share.
BAE shares were trading at 420.7 pence at 1008 GMT, below their level when the aerospace industry gathered for the Dubai Airshow amid expectations of a Typhoon deal in November.
Thinly-traded shares in Rafale manufacturer Dassault Aviation rose over 2 percent. The company did not respond to requests for comment.
DASSAULT PROSPECTS BRIGHTEN?
Dassault had been seen as the leading contender to win the UAE contract until it was publicly criticized by Abu Dhabi over the Rafale aircraft's price two years ago.
"It's difficult to see how it can be bad news for Dassault, although it is not clear whether this is a halt of the whole process or just for Typhoon," UBS analyst Charles Armitage said.
Britain's defence industry claims to be the second-largest exporter of defence equipment and services behind the United States, and the sector employs 100,000 people in the UK.
The outlook is tough amid shrinking domestic defence budgets and fierce competition for export deals. Deloitte said in a recent report that the global defence sector would see revenues decline for a third consecutive year in 2013.
In a further potential setback, BAE Systems also said it had still not reached agreement with Saudi Arabia over the pricing of Eurofighter jets in an earlier deal.
The continued delay of the so-called Salaam deal has pushed BAE to repeatedly trim its full-year earnings forecasts, and JP Morgan Cazenove analysts said the failure to reach agreement was perplexing.
"In theory this should be easy to resolve," they said, adding that the amount of money at issue in the disagreement, over whether the original price agreed included inflation, was only about 600 million pounds.
The Gulf state agreed to buy 72 Eurofighter jets in 2007 for 4.43 billion pounds at the time.
But not all analysts are worried about the pricing delay.
"Does it really matter if it drops into 2013 or 2014? The important part is it gets signed and it gets signed at an appropriate level of profitability to BAE," Armitage said. ($1 = 0.6111 British pounds)
(Additional reporting by Praveen Menon; editing by Tim Hepher and Tom Pfeiffer)