UPDATE 1-France won't rule out bigger EADS-BAE stake - source

(Wraps further quotes, Hollande and background)

PARIS, Oct 5 (Reuters) - France will not rule out buyingshares from Lagardere that would raise its stake in amerger of EADS and BAE , a French governmentsource said on Friday, raising the prospect of a deal-breakingclash with Britain.

The source, speaking on condition of anonymity, doubted adeal could be reached on the planned mega-merger of the Europeanaerospace group and UK defence firm by an Oct. 10 regulatorydeadline and expected that date to be extended by 28 days.

"The governments of France, Germany and Britain stilldisagree concerning the level of German and French stakes butdiscussions are continuing," said the source, adding: "This is anormal phase in the negotiations."

Speaking on the margins of a summit in Malta, FrenchPresident Francois Hollande signalled that the companiesinvolved would have to take into account the views of thegovernments involved.

"We have said what we consider to be the conditions,"Hollande told reporters at a summit of North African andEuropean countries. "After that it's up to the companies tocontinue their talks or negotiations knowing France's position."

France already has a 15 percent stake in EADS and thegovernment source said it "wishes to give itself the option" ofpurchasing a 7.5 percent stake in EADS which diversified holdingcompany Lagardere wants to sell.

Britain in particular wants France to forego that right inorder to make the deal more presentable to authorities in theUnited States, where BAE earns nearly half of its revenue.

(Reporting by Emmanuel Jarry and Julien Ponthus; editing byMark John)

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