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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 billion aerospace merger from the political jockeying that threatens to sink it, as doubts grow over German backing for the deal.

The European companies have until 1600 GMT on Wednesday to declare their intentions and either scrap their merger or ask UK regulators for more time or finalise their plans to create the world's largest aerospace and arms group.

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

Several sources close to the negotiations said German Chancellor Angela Merkel had opposed the proposal to combine Airbus passenger airplanes with UK defence contractor BAE.

"Merkel is against the deal but has not given reasons," a source 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 a statement in the morning.

At 0925 GMT shares in BAE were down 1.6 percent at 320.2 pence in London, while EADS shares were down 0.15 percent at 26.065 euros in Paris.

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

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

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

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

But by late that evening it appeared that there were three lines drawn in the sand, each of which excluded one of the British, French and German governments, leaving the highly political European merger in danger of collapse.

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THREE-WAY TUSSLE

France and Germany want to keep a strong say in the combined company, while Britain wants to protect BAE from state ownership, which could affect its contracts in the United States.

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

France and Britain, meanwhile, could accept unequal stakes between France and Germany, but Berlin demands parity. Sources involved in the deal said Germany also wanted to ensure there was a major headquarters in Munich to counter corporate centres in Toulouse, France, and Farnborough, Britain.

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

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

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

The merger has faced growing unease from investors in both companies who complained they were ill-prepared and lacking information. Many people bought shares in EADS on the strength of 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, Paul Taylor, Andrea Shalal-Esa and Tim Hepher; Writing by Tim Hepher and Jane Barrett; Editing by Will Waterman)

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

Keywords: EADS BAE/