* German veteran says Russia needs help to swallow Ukraine setback
* Bitterlich says EU should make generous offer
* Recalls how aid, outreach smoothed fall of Soviet empire
PARIS, Feb 27 (Reuters) - The European Union should engage Russia with a far-reaching offer of free trade and eventual visa-free travel to help it overcome anger at seeing Ukraine drift away from Moscow's orbit, a veteran German troubleshooter says.
Joachim Bitterlich was Chancellor Helmut Kohl's right-hand man in negotiations that led to Germany's peaceful unification and the largely bloodless break-up of the Soviet bloc after the Berlin Wall fell in 1989, and for most of the 1990s.
"We have to stop permanently humiliating Russia and help it overcome its paranoia and inferiority complex," the former diplomatic adviser, who now teaches and works as a consultant in Paris and Berlin, told Reuters in an interview.
The EU should make a generous offer to Russian President Vladimir Putin while making clear it will not tolerate mischief-making or military adventurism in Ukraine, he said.
At the same time, it should participate in international financial assistance for Ukraine and conclude a free trade agreement in return for economic and governance reforms, with a promise to review EU relations with Kiev in a decade.
The EU is in the front line because, seen from a European perspective, the United States has disengaged from Europe.
A senior European source said that deep down, Putin does not accept Ukraine as a fully independent state, seeing it as part of Moscow's sphere of influence. In private, he has told some European leaders Ukraine is a construct of the United States and the European Union.
Critics say Washington has zig-zagged on Ukraine over recent decades. In 1991 then President George Bush warned Ukraine against "suicidal nationalism" a few months before it voted to break away from the Soviet Union. In 2008, President George W. Bush's tried and failed to put Ukraine on a path to NATO membership.
The elder Bush's speech was dubbed the "Chicken Kiev speech" by U.S. conservatives who accused him of betraying Ukrainians' aspirations for freedom. The younger Bush's initiative was thwarted by Ukrainian public reluctance and German and French opposition within NATO.
ENGAGEMENT OR APPEASEMENT?
The Europeans have a long record of trying to engage with Russia.
Bitterlich cited as examples Kohl's financial aid to Moscow to cushion the repatriation of Soviet troops from former communist East Germany and eastern Europe in the 1990s, and Chancellor Willy Brandt's "Ostpolitik" of detente with the Soviet Union in the 1970s.
Brandt espoused a policy of "change through rapprochement" in contrast to the Cold War confrontation of the 1950s and 60s.
Now as then, some Western officials regard such policies as verging on appeasement and believe Russia should be contained rather than rewarded.
Former Soviet republics Estonia, Latvia and Lithuania and former Warsaw Pact allies in central Europe are now members of the EU and NATO, and many are deeply wary of wooing Moscow.
Poland, while working to improve its relations with Russia, has championed the EU's Eastern Partnership policy of offering economic integration and aid to six former Soviet republics in return for EU-prescribed reforms.
Georgia and Moldova have accepted such deals, while Armenia pulled out last year under strong Russian pressure.
It was Russian-backed Ukrainian President Viktor Yanukovich's decision to turn his back on such an association agreement in November that triggered the pro-European protests that led to his overthrow last weekend.
Poland has pressed for the EU to go further and offer Ukraine the long-term prospect of membership but France and Germany are reluctant to give such a commitment.
European Council President Herman Van Rompuy forecast in early February that the EU would prevail in Ukraine because its lifestyle and values were more attractive than Russia's.
"Some people think Europeans are naïve; that we prefer carrots over sticks," he told a Munich security conference in a swipe at U.S. criticism. "Our biggest carrot is a way of life; our biggest stick: a closed door."
Russia has blown hot and cold on Ukraine, denouncing the ousting of Yanukovich as illegitimate, warning against alleged threats to the lives of Russian citizens and now putting troops and fighter jets in Western Russia on alert.
At the same time, Foreign Minister Sergei Lavrov praised relations with the EU at a meeting with EU ambassadors on Wednesday, confirming Russia's readiness "to develop long-term mutually advantageous cooperation", according to Itar-TASS.
And a Russian finance ministry said Russia would take part in talks on an IMF package to rescue Ukraine's economy, RIA news agency reported on Thursday.
Bitterlich said Germany, as the largest EU power and due to its good ties with Moscow, was well positioned to engage Russia in a more cooperative relationship with the 28-nation bloc.
Chancellor Angela Merkel has talked frequently with Putin by telephone - they converse in German and Russian without interpreters. She has also offered Ukrainian opposition leader Yulia Tymoshenko medical treatment and moderating political advice since she was released from prison on Saturday.
German Foreign Minister Frank-Walther Steinmeier played a key role with his Polish and French colleagues in negotiations in Kiev last week to prevent a bloodbath.
French analyst Dominique Moisi said the Europeans had an opportunity to restore some lost public faith in the EU by supporting Ukraine while taking Russian interests into account.
"Understanding Russia's sensitivity towards Ukraine and respecting Moscow's security interests in Crimea are one thing. But accepting the finlandisation of Ukraine is another," Moisi wrote in the French daily Les Echos, referring to Finland's neutrality under strong Soviet influence during the Cold War.
Noting that the future of Ukraine was at least as important to Europe as that of Mali and the Central African Republic, where France has intervened militarily in the last year, Moisi said Europe had a duty to protect Ukraine from Russia and also from its own internal demons of corruption and lawlessness.
(Writing by Paul Taylor; editing by Janet McBride)