(Adds Fonterra comment)
WELLINGTON/PARIS, Jan 9 (Reuters) - French food group Danone said it would sue dairy exporter Fonterra and cut its supply contract with the New Zealand firm following a false alert that sparked the recall of infant formula across Asia.
The world's largest yoghurt maker did not say how much compensation it was seeking, but it has previously said it wanted full compensation for what it says were 350 million euros ($476 million) in lost sales following the recall of its Dumex and Karicare infant formula products.
In August, Fonterra said it had found a potentially fatal ingredient in a range of products sold by multinational companies. After recalls were issued across nine countries including China, the scare turned out to be a false alarm because the ingredient was found to contain a less harmful bacteria.
In a statement, Danone said it was starting proceedings in the New Zealand High Court against the world's largest dairy processor, which supplies milk powder and other dairy ingredients to the French firm. Danone would also start arbitration proceedings in Singapore to obtain compensation.
The company said it was also terminating its supply contract with Fonterra and would make any further collaboration contingent on a commitment by Fonterra to full transparency and compliance with Danone's food safety procedures.
"This affair illustrates serious failings on Fonterra's part in applying the quality standards required in the food industry," Danone said.
Fonterra confirmed legal proceedings had begun, adding it would "vigorously" defend any action. The farmer-owned co-operative has denied any legal liability to Danone regarding the recall.
"Fonterra has been in ongoing commercial discussions with Danone and is disappointed that they have resulted in legal action," the company said in a statement.
Units in Fonterra's sharetrading fund fell as much as 2.7 percent on the announcement, before trimming losses.
The two sides started negotiations in October to try to resolve the dispute.
Danone has said it was taking longer than expected to recover from the recall of high-margin infant formula and cut its sales, profitability and free cash flow goals for 2013.
It was forced to recall its Dumex formula products in China, where demand for foreign branded infant formula is high due to a series of domestic food quality issues.
Baby food accounts for 20 percent of Danone's revenue, second only to its dairy business, and Asia, notably China, is a key growth market at a time of sluggish demand in Europe.
Fonterra controls roughly one-third of global dairy exports and is a major wholesale supplier of milk powder used in milk formula and other food products marketed by Danone, Nestle and other multinationals.
The food safety scare and drought conditions in New Zealand which curbed supply in early 2013 has highlighted the risk of over-reliance on one supplier, and some dairy brands in China have started to look to diversify their supply.
(Reporting by Naomi Tajitsu and Geert De Clercq. Editing by Dean Yates)