The proposals, agreed by Chancellor Angela Merkel's office and the economy ministry, are aimed at preserving a balance of power between the two countries in a merged company, the source said.

France directly owns 15 percent of EADS, the maker of Airbus jets, and wants to retain its right to influence group strategy, currently conducted through a complex pact with 7.5-percent shareholder Lagardere (LAGA.PA).

In turn Germany is not a direct shareholder but sees the transaction as a chance to tighten its grip on a stake currently held by Daimler AG (DAIGn.DE) and a group of banks.

The German source gave no further details but his comments confirmed a report in Die Welt on Friday which also said Germany was ready to buy up the shares of Daimler and the banks via the state development bank KfW if France kept its own stake intact.

The merger to create the world's largest defense and aerospace company would dilute the influence of the French, German and Spanish governments in the company, prompting negotiations over their future roles.

The Financial Times Deutschland daily reported on Friday that Germany and France may try to secure a 27 percent combined shareholding in the new company, but said Britain was opposed.

The stake would create a shareholder counterweight with the power to block decisions by the management of the new company, the FTD said, citing sources familiar with the matter.

STATE INVOLVEMENT

The move could also prove a deal breaker since EADS boss Tom Enders has repeatedly said he wants to reduce state influence in a combined company and Britain and the United States remain wary of further state involvement.

The FTD said the idea enjoys French support, but France has so far proved unwilling to be pressured into trading concessions for the sake of a common position with Germany, given the mismatch of share holdings.

It was an open question whether Germany would approve such a proposal, the paper said, quoting industry sources.

The two countries should also each get a seat on the board of directors of the merged company, the FTD said.

German reservations over the merger include how to safeguard jobs and protect the new company from any future hostile takeover, according to a government document obtained by Reuters on Monday.

Last Saturday France and Germany agreed at a summit to "consult" on the merger talks, but French President Francois Hollande avoided pledging to create a common position between the two countries, despite earlier German hopes of a joint initiative.

On paper, the idea of a core 27 percent shareholding suggests France would buy Lagardere's 7.5 percent stake and the German government would take over all of Daimler's voting interest of 22.5 percent. This would leave each side with a diluted stake of 13.5 percent under the proposed merger terms.

But two European defense experts who asked not to be named said this would hit opposition from Britain and the United States and nobody has yet come forward to claim ownership of the scheme.

Instead EADS and BAE have said they will offer the governments of France, Germany and Britain a "special share" in the new company, allowing them to block any future hostile takeover, but are determined to prevent meddling in other management decisions.

(Reporting by Gernot Heller, Gareth Jones, Edward Taylor and Tim Hepher. Writing by Gareth Jones. Editing by Andre Grenon and Greg Mahlich)

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