Germany is unhappy about its share of work on the $15 billion A350 aircraft project and has withheld half of a roughly 1.2 billion euro development loan, sources close the matter say.

In a rare intervention, French Prime Minister Jean-Marc Ayrault said it was essential all partners met their funding commitments for the A350, the newest generation of aircraft in the European planemaker's fierce rivalry with Boeing (BA.N).

Speaking at the inauguration of an A350 production plant in southwest France, Ayrault did not refer to France's closest ally by name. But he left no doubt that he was referring to the rift with Germany, which has deepened since Berlin blocked a merger between Airbus parent EADS and UK's BAE Systems (BAES.L).

Speaking to over 1,000 workers, Ayrault said:

"The European partner nations...have always played a major role in the development of major aerospace projects," he said.

"It is of course the case for the A350, and it is essential that their commitments are met in full. As for France, its own commitments will be respected."

Plans for the $45 billion merger to form the world's largest aerospace and defence group fell part earlier this month with most of the participants blaming German Chancellor Angela Merkel for derailing the deal, something Berlin denies.

Flanked by heads of EADS and Airbus during an emotional ceremony honouring one of the planemaker's founders, Ayrault gave strong backing to EADS Chief Executive Tom Enders.

"I have supported EADS," he told reporters. "It is very important to give a message of confidence to the whole of the EADS group, not just Airbus, and I think this was expected."

Enders, a German-born executive who has clashed with Berlin over his decision to base the aerospace group in Toulouse where many of its aircraft are built, chatted and joked with airline customers but did not take a direct part in the ceremony.

His successor at the helm of Airbus, Frenchman Fabrice Bregier, acknowledged the tensions with Berlin.

"To my knowledge, we've still some debates in Germany and only in Germany," he told reporters. "But I'm very confident that we'll get through that and that we'll demonstrate that the A350 is not limited to the assembly line in Toulouse."

LIGHTER JETS

Even as European nations argue over A350 funding, the use of government loans to help finance Airbus projects is itself the subject of a bitter trade dispute with the United States.

"Father of Airbus" Roger Beteille, 91, paid tribute to European aircraft co-operation as he received a standing ovation from Airbus workers in the assembly hall named in his honour.

The new Airbus jet heralds a new phase in the race for fuel efficiency and profits with U.S. rival Boeing.

Built in response to the Boeing 787 Dreamliner, the A350 is Europe's first contribution to a new generation of jets designed to cut airline fuel bills by using mainly lightweight carbon-composite materials instead of heavier aluminium.

Airbus and Boeing expect total demand for more than 6,000 such mid-sized, long-range jets worth hundreds of billions of dollars over the next 20 years.

Their arrival is expected to alter the shape of long-haul travel by leading to new routes bypassing crowded hub airports, since the aircraft are smaller than people-carriers such as the Airbus A380 superjumbo and the newest version of Boeing's 747.

But both firms face huge construction challenges for the revolutionary jets, woven and baked out of carbon fibre that is stronger and lighter than metal but costlier to produce. Neither the A350 nor the 787 is expected to make a profit for years.

Airbus says the A350 will take to the skies in the summer of 2013 and enter service in the second half of 2014. Production is scheduled to peak at 10 aircraft a month in 2018. Three variants will be produced, seating between 270 and 350 people.

Bregier confirmed that Airbus was looking at increasing volumes for the largest of the three, the A350-1000, in a battle for the mini-jumbo market as reported by Reuters on Monday. (Additional reporting by James Regan, Editing by Erica Billingham)

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