* Regulators demand more asset sales than initially expected
* Demands reach size that allow either side to pull out
* Both sides "remain in constructive dialogue" - Linde
* Linde shares fall 1.3 pct (Adds source on talks, analyst comment, proposed sell-offs)
MUNICH, Aug 22 (Reuters) - Industrial gases giants Linde and Praxair are in talks to try to salvage their $83 billion merger after U.S. competition regulators demanded they sell assets that generate more than $4.3 billion in sales.
Linde said on Wednesday the divestments were expected to reach a level that would allow either party to abandon the deal, although the German company added that talks continued with both Praxair and regulators.
Analysts said they still expected the deal to go ahead, though they cautioned the asset sales could make the deal less attractive and/or make synergy targets harder to achieve.
Linde and U.S.-based Praxair agreed an all-share merger in principle in December 2016, aiming to create a global leader in gas distribution ahead of France's Air Liquide, which had also bulked up with the takeover of rival Airgas.
The companies agreed that if antitrust regulators demanded the disposal of businesses with more than 3.7 billion euros ($4.3 billion) in sales, or 1.1 billion euros in earnings before interest, taxes, depreciation and amortisation (EBITDA), either party could withdraw without penalty.
Linde said on Wednesday it expected the revenue threshold for divestment commitments to be exceeded, but didn't say by how much and did not mention the EBITDA hurdle. It had previously warned this was very likely to happen.
"Linde and Praxair remain in constructive dialogue with each other and the regulators on how to satisfy their requirements," Linde said.
Earlier this month, the U.S. Federal Trade Commission (FTC) asked for more assets to be sold than previously anticipated and also said it wanted prospective buyers of these assets to meet certain other requirements.
Bids for major U.S. firms have had mixed fortunes recently.
U.S. President Donald Trump in March blocked Singapore-based microchip maker Broadcom's $117 billion takeover proposal for Qualcomm on national security grounds.
The $63 billion takeover of seeds maker Monsanto by Germany's Bayer, meanwhile, went through after 7.6 billion euros worth of disposals.
A source familiar with Linde's thinking said both companies were doing everything they could to see the deal through, but they could not lose track of the targeted $1.2 billion in annual synergies without perhaps putting shareholders' support at risk.
Commerzbank analyst Michael Schaefer said he expected Linde and Praxair to seek to address the FTC's demands.
"The fact that they remain in constructive talks signals to us that there is still readiness on both sides to stay the course", he said.
Linde shares were down 1.3 percent at 0915 GMT, paring initial losses of 2.3 percent.
The German group last month lined up a consortium of gases firm Messer and investor CVC as a buyer of North and South American assets to allay antitrust concerns, while Praxair's European gases business will be sold to Japanese rival Taiyo Nippon Sanso Corp.
The source said U.S. regulators had some qualms about the proposed buyer of the former block of assets, which Linde has been trying to address.
While the European Commission gave its go-ahead this week, regulators in the United States, China, India, Brazil, South Korea, Argentina and Chile have yet to decide.
Arne Rautenberg, a fund manager at Frankfurt-based Union Investment, this week said he expected the deal to be salvaged, but added Linde might have to shed its high-margin on-site business in the United States, an operator of gas production facilities near petrochemical and steel plants, which would be a "huge blow".
The regulatory challenge is a setback for Linde Chairman Wolfgang Reitzle, who has been a driving force for the deal and had to reshuffle management following the departure of the company's chief executive and finance chief.
The companies face an Oct. 24 deadline to complete the deal under German financial market rules.
The time pressure would put Linde and Praxair in a weak position when negotiating a price with prospective buyers of the assets, analysts have said.
(Writing by Ludwig Burger; Editing by Gopakumar Warrier and Mark Potter)