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UPDATE 1-European governments in race to save EADS-BAE merger

* Talks resume after failure to agree state shareholdings

* Plan ready to extend deadline if political progress made

* BAE top investor Invesco attacks $45 billion merger plan

* UK minister warns of "red line" regarding state stakes

(Adds background) By Tim Hepher

PARIS, Oct 8 (Reuters) - Britain, France and Germany pushedon with talks on Monday aiming to prevent a disagreement overstate shareholdings wrecking a proposed merger of EADSand BAE Systems .

Plans by Airbus parent EADS and UK arms firm BAE Systems tocreate the world's largest aerospace and defence company mustovercome a knot of political concerns over security and jobs.

Facing a 1600 GMT Wednesday deadline set by Britain, thegoal is to make enough progress over the central issue doggingthe talks to allow BAE Chief Executive Ian King and Tom Endersof Franco-German EADS to seek an extension.

BAE's top investor questioned the very rationale of the $45billion deal.

"If they can get the central issue of shareholding resolved,then there'll probably be some more time to tie up other issueslike headquarters, weights on the board and other matters," saida senior diplomat following the talks.

"Otherwise, Enders and King have signalled they will pullthe plug on the 10th (Wednesday)."

Officials failed to resolve incompatible demands over stateinvolvement in a video conference on Friday. EADS and BAE deniedGerman reports that the talks had collapsed.

British Defence Secretary Philip Hammond warned on Sundaythat Britain would block the deal if key "red line" prioritieswere not met, including an ability to cap the influence theFrench and German governments would have on the new company.

He told the BBC on Monday he saw little chance of a dealbeing reached by Wednesday's deadline.<-------------------------------------------------------------EADS/BAE market cap, share price multiple------------------------------------------------------------->

Plans have already been drawn up to request extranegotiating time, but the companies are unwilling to releasepressure by deploying them until they have some real politicalprogress to show British regulators, banking sources said.

People close to the talks said Britain appeared most open tothe deal, Germany was the least keen and France wanted more timeto think it over. Yet as problems pile up, all sides have movedto deflect the responsibility in case the talks break down.

Despite the negative atmosphere left by Friday's pressbriefings, industry experts say it is too early to say whetherthe merger will happen but note the parties are used tonegotiating down to the wire.

EADS was created from a merger in 2000 only after talksbetween France and Germany broke down and the plan collapsed,bringing the two sides back together to negotiate a complexshareholder pact limiting the role of the French state.

However, those negotiations were held in secrecy while ablizzard of publicity surrounding the latest talks has broughtpressure from investors and unleashed new negotiating demands.

BAE's top shareholder Invesco Perpetual blasted the proposeddeal on Monday, citing state interference, poor terms and a lackof strategic rationale. The investment company, which has 13percent of BAE, is reported to have clashed in private with BAEleaders as soon as the talks surfaced last month.

BAE shares dipped 1 percent. EADS was fractionally lower. SOVEREIGNTY

In order to improve the chances of winning approval in theUnited States, Britain wants France to commit in writing toforego any future increases in its shareholding, which wouldstart out at 9 percent under a proposed 60:40 split between EADSand BAE.

France has told partners it has no intention of upping itsstake but is unwilling to surrender sovereignty over futureindustrial policy. Barring a wider escalation of the problemssurrounding the deal, sources briefed on the discussions said aformula would probably be found to get round the impasse.

Government leaders are being kept in the loop on the talksbut there are so far no plans for direct intervention or athree-way summit, officials said.

Britain's David Cameron faced a revolt over the merger by 45members of parliament last week after they said in a letter tothe prime minister that Germany and France should take no stakesin the new company.

Their stance was met with opposition from a surprisingsource on Monday, when Mike Turner, the former chief executiveof BAE who sold the company's stake in Airbus in 2006, wasquoted as saying links with EADS now would help.

"It's widely recognised that large parts of BAE's UKoperations face a run down in activities in the next few yearsas existing programmes come to an end," he told the FinancialTimes, adding jobs would be lost.

"If you put BAE and EADS together, the BAE part of theentity would benefit from a stronger balance sheet of thecombined group and would be in a better position to win neworders, especially in export markets."

Britain left open the door on Sunday to a German stateparticipation in EADS-BAE in a move towards addressing Berlin'sdemands for equal treatment with France in the new group.

Germany has renewed demands to have the headquarters and isinvolved in potentially tough negotiations with EADS about jobguarantees and company conditions on continued defence orders.

"Whether this can be resolved depends on whether everyonewants this to work," the diplomat said.

The United States is seen likely to want assurances that asystem of co-operation in EADS between French and Germangovernments or their industrial allies will not be resurrected.

Any risk of foreign state control is crucial as Washingtonconsiders whether to impose new conditions on the way BAEoperates in the United States - a red line for the company andBritain.

Negotiators are keen to keep respective state shareholdingsunder 10 percent to avoid stirring U.S. concerns over possibleforeign influence on its defence sector, an issue seen certainto be highlighted by Boeing and other U.S. rivals.

U.S. experts said this weekend anything over that figurewould undermine the chances of U.S. approval.

(Additional reporting by Kate Holton, Andrea Shalal-Esa, PaulTaylor, Sophie Sassard; editing by Janet McBride)

((tim.hepher@thomsonreuters.com)(+33 1 49 49 54 52)(ReutersMessaging: tim.hepher.thomsonreuters@reuters.net))

Keywords: EADS BAE/