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UPDATE 1-EADS, BAE in last-ditch struggle to save merger

(Adds defence analyst comment, share movement)

* Doubts over German backing for $45 bln aerospace merger * UK Takeover Panel deadline at 1600 GMT * BAE shares down 1.6 pct By Sophie Sassard and Jason Neely LONDON, Oct 10 (Reuters) - EADS and BAE Systems

are engaged in a final push to rescue their $45 billionaerospace merger from the political jockeying that threatens tosink it, as doubts grow over German backing for the deal.

The European companies have until 1600 GMT on Wednesday todeclare their intentions and either scrap their merger or ask UKregulators for more time or finalise their plans to create theworld's largest aerospace and arms group.

"We will keep going until 5 (pm London time)," a personinvolved in the negotiations said.

Several sources close to the negotiations said GermanChancellor Angela Merkel had opposed the proposal to combineAirbus passenger airplanes with UK defence contractor BAE.

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

A spokesman for the German government declined to comment.

Early on Wednesday EADS said it had no plans to issue astatement in the morning.

At 0925 GMT shares in BAE were down 1.6 percent at 320.2pence in London, while EADS shares were down 0.15 percent at26.065 euros in Paris.

Brinkmanship is common in European negotiations, andFranco-German-led EADS was itself only created after talks aboutits structure collapsed and were resurrected weeks later.

But with the current negotiations taking place in a glare ofpublicity, the margin for manoeuvre is rapidly dwindling.

On Tuesday, French Defence Minister Jean-Yves le Drian saidnegotiations on the merger had moved forward.

"We had made a lot of progress, I think, but have weprogressed enough? That is up to those who initiated the projectto say," the minister said.

But by late that evening it appeared that there were threelines drawn in the sand, each of which excluded one of theBritish, French and German governments, leaving the highlypolitical European merger in danger of collapse.

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THREE-WAY TUSSLE

France and Germany want to keep a strong say in the combinedcompany, while Britain wants to protect BAE from stateownership, which could affect its contracts in the UnitedStates.

Germany and Britain could accept lower state shareholdingsthan is the case at EADS, which is more than half controlled byFrance, Germany and Spain, but France rejects that.

France and Britain, meanwhile, could accept unequal stakesbetween France and Germany, but Berlin demands parity. Sourcesinvolved in the deal said Germany also wanted to ensure therewas a major headquarters in Munich to counter corporate centresin Toulouse, France, and Farnborough, Britain.

Under rules set by the UK Takeover Panel, EADS and BAE canask for an extension to their negotiations, but only if EADS"has every reason to believe that it can and will continue to beable to implement the offer".

"Extending the deadline will not change the dynamics of thenegotiation and would almost certainly weaken the positions ofKing and Enders going forward, as it would signal they felt theyhad no other acceptable options," said David Reeths, Directorfor consulting at defence analysts IHS Jane's.

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

The merger has faced growing unease from investors in bothcompanies who complained they were ill-prepared and lackinginformation. Many people bought shares in EADS on the strengthof its Airbus civil unit, rather than its defence ambitions,while BAE investors were attracted by its dividend yield.

(Additional reporting by Matthias Blamont, Arno Schuetze, PaulTaylor, Andrea Shalal-Esa and Tim Hepher; Writing by Tim Hepherand Jane Barrett; Editing by Will Waterman)

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

Keywords: EADS BAE/