* Negotiations continue in battle to attract French partners
* French FTT plus prospect of EU levy sour mood
* European bourse operators already see market share down
PARIS, Dec 20 (Reuters) - France's unloved financial transaction tax is hampering its efforts to persuade local institutions to buy stakes in Paris stock exchange operator Euronext and keep it under French influence after its expected spin-off next year.
Battling to halt a long-term drift of business away from Paris to rival financial centres such as London and Frankfurt, President Francois Hollande's government is urging local market players to signal their interest in Euronext, which also runs the Amsterdam, Brussels and Lisbon bourses.
But while Finance Minister Pierre Moscovici said last week he was confident negotiations would result in a deal, others do not share his optimism.
"If Paris's political and business communities do nothing, then, even with an IPO, a takeover of Euronext by one of the three big contenders is unavoidable," Gérard Rameix, president of French market regulator AMF told Reuters, citing U.S.-based Nasdaq OMX, Germany's Deutsche Boerse and the London Stock Exchange (LSE) as potential predators.
Nasdaq, LSE and Deutsche Boerse declined to comment.
Earlier this year Nasdaq OMX Chief Executive Robert Greifeld had said the company would consider a bid for Euronext if the opportunity arose.
Atlanta-based IntercontinentalExchange Inc, which owns a network of exchanges and clearing houses, has made clear that it plans to spin off Euronext following this year's $10-billion-plus merger with NYSE Euronext.
Once based in Paris and Amsterdam, Euronext saw decision-making shift from the French capital to New York in 2006 when it was bought by NYSE, a move that had already prompted some market participants to leave Paris for London and elsewhere.
French banks, such as Societe Generale, Credit Agricole and BNP Paribas SA, as well as insurer AXA have been approached to take a stake in Euronext, whose IPO is expected to be worth between 1 billion and 1.5 billion euros ($1.4-2.1 billion)
BNP Paribas, Credit Agricole and Axa declined to comment. Officials from Societe Generale were not immediately available to comment. The chief executive of Axa, Henri de Castries, told Reuters in April that he was not interested in buying Euronext.
Euronext Chief Executive Dominique Cerutti told Les Echos newspaper recently that ICE wanted to put together a stable core group of shareholders and hold onto a 25 percent equity interest alongside other shareholders - for example banks.
But sources close to the discussions say negotiations are proving difficult because of anger among France's financial sector players over a domestic tax on financial transactions introduced last year, and the prospect that euro zone will also impose one.
Moreover, French financial institutions are reluctant to buy into a market operator that has already moved virtually all its data centres to London.
"The government wants to ensure Euronext remains anchored in Paris, but bankers wonder if Euronext still has a French soul. Isn't it too late?" said one Paris-based banker.
EURO BOURSES ALREADY SUFFERING
The French financial transaction tax is a 0.2 percent levy on stock purchases of French publicly traded companies with a market capitalisation of 1 billion euros or more.
Annual proceeds from the tax were originally seen at around 1.6 billion euros, but Socialist lawmaker Christian Eckert recently said it's currently estimated at 600 million euros.
Market players fear that an EU trading tax across the euro zone could kill off Euronext and other market operators in the region.
"If governments avoid this madness, then we could look at Euronext," Vivien Lévy-Garboua, senior advisor at BNP Paribas , wrote on a blog on French newspaper Agefi website.
The French tax and a similar levy in Italy this year have been linked to lower trading volumes on their bourses, an early glimpse of the potential impact of a pan-European levy.
According to Euronext, volumes on shares hit by the French tax are 20 percent lower than those on other shares.
The European Union has also been considering a tax on stock, bond and derivatives trades as a way of raising about 35 billion euros a year from banks starting in 2014 to claw back the taxpayer aid they received in the financial crisis.
Britain and 15 other EU countries have refused to support the proposed tax, which has been backed by Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia.
But worries over unintended consequences have mounted among some of the countries taking part, and the 11 EU countries that have pledged to implement the tax are now considering narrowing the levy's scope to shield pensions, government debt and markets that help to grease the economy.
"The danger is that it destroys Euronext's business: the trading flows," warned Edouard-François de Lencquesaing, adviser to the Paris Europlace grouping that represents the French financial market sector.
Henri de Castries, chief executive of AXA, Europe's no. 2 insurer, whose asset management arm AXA IM has 536 billion euros ($738 billion) under management, has already ruled out buying into Euronext, saying Hollande's tax policies had endangered France's financial sector.
European market operators such as Euronext and Deutsche Boerse have already seen their share of the market fall in the past five years while alternative platforms such as the London-based order-driven BATS Chi-X equities exchange have grown.
Euronext's share in its core French market, home to multinationals such as Louis Vuitton owner LVMH and Airbus parent EADS, has dropped from 97.7 percent in early 2008 to 60.7 percent currently, according to Thomson Reuters Equity Market Share Reporter data.
Across Europe, its market share has fallen from 22.4 percent in 2008 to 13.8 percent.
New listings volumes also show the once buoyant Euronext is well off the pace; its share of European IPOs is just 12.5 percent, while the LSE has 45 percent, a French government report showed.