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UPDATE 2-EADS, BAE in last-ditch struggle to save merger

(Adds source on deadlock, French spokesman, background, updatesshares)

* Doubts over German backing for $45 bln aerospace merger * UK Takeover Panel deadline at 1600 GMT * BAE shares down 0.9 pct By Sophie Sassard and Jason Neely

LONDON, Oct 10 (Reuters) - Talks on a $45 billion Europeanaerospace merger of EADS and BAE Systems were in deadlock hoursahead of a regulatory deadline on Wedenesday, and only theFrench, German and British leaders can break the logjam, sourcesfamiliar with the negotiations said.

With Germany holding out against it, EADS and BAESystems have until 1600 GMT to declare their intentionsand either scrap the merger, ask UK regulators for more time orfinalise their plans to create the world's largest aerospace andarms group, employing about 220,000 people.

"Talks are ongoing. A decision is to be announced latertoday," French government spokesman Najat Vallaud-Belkacem tolda weekly media briefing.

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

One source said the deadlock would only be broken if GermanChancellor Angela Merkel, French President Francois Hollande andBritish Prime Minister David Cameron signalled their approvalfor more talks.

"Things remain blocked. There has been no movement sincelast night" the source said.

Securing such an enormous and complicated cross-border dealin a sector where commercial considerations are typicallytrumped by political, economic and national security concernswas always going to be desperately difficult.

Several sources close to the negotiations said Merkel hadopposed the proposal to combine Airbus passenger airplanes withUK 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.

British Defence Secretary Philip Hammond said the decisionwas in the companies' hands and he was waiting for anannouncement from them.

At 1108 GMT shares in BAE were down 0.9 percent at 322.4pence in London, while EADS shares were up 0.34 percent at26.205 euros in Paris.

Brinkmanship is common in European negotiations, andFranco-German-led EADS - whose full title is the EuropeanAeronautic Defence and Space Company - was itself only createdafter talks about its structure collapsed and were resurrectedweeks 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 merger indanger 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, where archrival Boeing is based.

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.

Germany does not currently have a direct stake in EADS, butis represented by industrial ally Daimler AG , whichholds just over 22 percent. France holds an identical stake,split between the state and French publisher Lagardere.

The British government holds a golden share in BAE thatallows it to block foreign takeovers.

Adding to the hurdles facing the deal, BAE's largestshareholder, fund manager Invesco Perpetual, with 13.3 percent,has said it is not convinced of the strategic rationale for thecombination.

(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/