UPDATE 5-Germany seen ready to block EADS-BAE merger

* Germany seen ready to block deal over 3-way impasse

* Britain, France had proposed state shareholding cap

* Germany demands parity with France, key headquarters

* UK deadline for deal expires 1600 GMT Wednesday

(Recasts after new setback in talks)

By Tim Hepher and Andreas Rinke

PARIS/BERLIN, Oct 9 (Reuters) - Plans for a $45-billionmerger between EADS and BAE Systems veered towards collapse lateon Tuesday as Germany appeared ready to block the deal in a rowover national stakeholdings.

The setback came hours before a regulatory deadline andscuppered plans for a statement before European stock marketsopen on Wednesday, in which the aerospace groups had beenexpected to indicate progress by seeking more time fornegotiations involving French, German and British officials.

Several sources close to the talks said German ChancellorAngela Merkel had signalled Berlin's opposition to the deal tocreate the world's largest aerospace and arms firm by unitingAirbus parent EADS with British defence contractor BAE.

"Merkel is against the deal but has not given reasons," asource involved in the negotiations told Reuters.

"Tonight, it is blocked," another person with detailedknowledge of the talks said, asking not to be named.

A spokesman for the German government declined comment.

The latest in a series of dramatic stops and starts sincethe word of merger talks first leaked on Sept. 12 came shortlyafter the British and French governments reported progress.

Barring a last-minute turnaround, the companies wereexpected to negotiate right up to the 1600 GMT cut-off point setby British regulators, sources familiar with the matter said.

Negotiators described the atmosphere as tense and frustratedas bickering immediately broke out behind the scenes to lay offthe blame in case the talks officially broke down.

Prospects for an extension to the deadline had risen earlierafter sources involved in the talks said Britain and France hadsettled a dispute between them over setting a ceiling on theFrench state's shareholding in the future combined group.

But the deal, to replace national quotas with a moreflexible overall cap, was rejected by Germany which wanted toensure parity with the French stake, whatever that might be.

The three-way logjam has made it difficult to carve a paththrough national rivalries and competing economic and industrialpolicies, while also meeting demanding conditions for approvalin the United States, a key client, especially for BAE weaponry.

EADS was set up in 2000 on the basis of strict power-sharing

between French and German interests but until now Berlin'sinterests have been represented by a private industrial ally,car firm Daimler .

In the new combined group, Germany insisted on a stateshareholding to match France's diluted government shareholdingof 9 percent - or more if France added to its stake.

A German government source said EADS and BAE were caught ina web created by three national "red lines", none of whichallowed for an agreement among Berlin, Paris and London:

"Germany and Britain could live with less stateparticipation; France can't," the source said.

"France and Britain could live with the loss of theFrench-German parity; Germany can't. France and Germany couldagree on a solution that would mean a bigger state participationif that keeps the parity; Britain disagrees."


But people in other camps expressed anger about the impasse,saying Germany had been offered what seemed to them generousterms, including a 9-percent shareholding matching France, agolden share and guarantees of jobs for Germans.

Two of these other sources said other parties to the talkshad baulked at a German demand for the transfer to Germany ofheadquarters of either the space or helicopter divisions ofEADS. This came on top of a row about where to site thecorporate headquarters of the new combined group.

If the deal collapses, it will be seen as a personal blowfor German-born Tom Enders, the head of EADS , and BAE

counterpart Ian King. They have staked their companies'reputations on realising a decade-old plan for an industrialgiant embracing both western Europe's leading aerospace firms.

"If I wasn't a born optimist, I would not have started thisproject," Enders told EADS staff in an article marking his 100thday in the job.

European aerospace has a history of deals that refuse to dieand EADS was itself only created after talks about its structureactually collapsed - only to be resurrected weeks later.

But with the current negotiations taking place in a glare ofpublicity, the margin for manoeuvre appears extremely tight.

A merger would combine the Airbus passenger planes andAriane space rockets of EADS with BAE's Hawk trainer, BradleyFighting Vehicles and submarines. The two companies alreadyco-operate in making missiles and the Eurofighter combat jet.

The merger has faced growing unease from investors in bothcompanies who complain they were ill-prepared and lackinformation. Many bought shares in EADS on the strength of itsAirbus civil unit, rather than its defence ambitions, while BAEinvestors were attracted by the British firm's dividend yield.

Both EADS and BAE have said the investment case will becomeclear when they are allowed by regulators to hold briefings.

(Additional reporting by Gernot Heller, Matthias Blamont,Sophie Sassard, Paul Sandle, Chris Vellacott, Arno Schuetze,Elizabeth Pineau, Andreas Rinke, Adrian Croft, SebastianMoffett, Mohammed Abbas, Julien Ponthus, Jason Neely, BlaiseRobinson, Simon Jessop and James Regan; Editing by Jane Barrettand Alastair Macdonald)

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

Keywords: EADS BAE/