Trade unions and employers are making slow progress on a pact to overhaul France's rigid labor rules, raising the chances that President Francois Hollande will have to take the potentially explosive issue into his own hands.

Rather than directly legislating reforms, the Socialist Hollande told the two sides to come up by year-end with new rules to offer companies more flexibility to hire and fire while ensuring more job security at the low end of the labor market.

The tactic was designed to yield a reform ambitious enough to show France can regain lost competitiveness in the global economy while sparing Hollande the risk of a backlash by unions and blue-collar workers, a core part of his electorate.

But with a December 31 deadline looming, agreement is nowhere in sight. Both sides have named "red line" conditions for signing any accord and one major union has flatly ruled out any deal that imposes greater flexibility on workers.

"As the deal stands, we can't sign," Stephane Lardy, negotiator for the hardline Force Ouvriere (FO) union, told Reuters last week as the latest round of talks went ahead.

As long as three out of France's five main trade unions back any deal, it would be possible for the government to use that accord as the basis for subsequent legislation in early 2013.

But if neither the FO nor the larger, militant CGT sign, Hollande could face street protests and union criticism that would hurt his Socialists' showing in 2014 municipal elections.

So sensitive is the reform that a government-drafted roadmap for the talks avoids use of the term "flexibility" so reviled by unions. It also leaves intact the 35-hour work week brought in by a Socialist government 15 years ago and which is still revered on the left as a sacred cow.

Moreover the negotiations will not address French labor charges, which alongside those in Belgium and Sweden are the highest in Europe and are seen by many economists as one of the main reasons that France is losing share in export markets.

Last month's announcement by Hollande of some 20 billion euros of tax credits to companies - which the government says equates to a six percent cut in labor charges - was broadly welcomed by business as necessary but not sufficient.

"This is the Achilles heel of France's economy," said ABN Amro economist Joost Beaumont of its labor rules. He noted that a Socialist government had more chance than a conservative one of clinching reform but fearing that any final deal would still be too weak to bring about genuine structural change.

PARTIAL DEAL?

Minor advances were made in talks last week as employers made concessions including offers of more health care coverage, and workers won an option of claiming jobless benefits to the end of their entitlement even if they find a job beforehand.

Unions have also agreed that company managers should have the scope to negotiate specific wage and work-time adjustments at a given worksite to help it through a downturn. Auto giant Renault already started doing just that last month.

But with just two negotiating sessions left in 2012, neither camp is offering concessions on the major bones of contention.

Unions maintain a firm objection to employer calls for a more flexible long-term work contract and reject any simplification of the legal process for laying off workers, as well as calls for capping compensation for lay-offs.

"If you facilitate firing in this country, we'll end up with a situation just like in Spain with sky-high unemployment," Lardy said. "We're going round in circles on this."

Employers, in turn, are opposed to union demands to penalize companies that make excessive use of short-term contracts by making them pay higher labor charges.

With three out of four new job contracts now only on a short-term basis, even the moderate CFDT union - which is otherwise keen to get a deal being by December 31 - says securing such penalties is non-negotiable.

"We're going to force our way through on this. It's unavoidable for the CFDT," said negotiator Patrick Pierron.

While CGPME, the federation of France's small- and medium-sized companies, says it could consider higher labor charges being attached to very short and frequently renewed contracts, main employers group Medef says any such reform is beyond the mandate of the negotiations.

Hollande's hopes of what he famously called a "historic" deal by year-end are already been played down.

Bruno Leroux, leader of the Socialist group in the National Assembly, told Reuters that talks were likely to stretch until January and even then might only result in a partial deal.

"We will not have totally wrapped it up by December, so we'll have to spill over into January a bit," he said. "Toward January 15 we will see if there is a deal, proposals, a full accord or a partial one."

Labor Minister Michel Sapin has said the government will introduce legislation in early 2013 even if the talks fail.

But in parliament, the Socialist party's left wing could seek to water down the reform's substance, while debates can open the government to attack from a rebellious far left.

The political climate for the final legislation could, in the meantime, get tougher.

Blue-collar workers already have the lowest opinion of Hollande's policies of any professional category, according to an October IFOP poll, and unions have ramped up sporadic protest action at several threatened industrial sites.

In an example of lost love, metalworker unions accused the government of lying last week after ministers backed down from a threat to nationalize a plant run by steel giant ArcelorMittal in a stand-off over threatened jobs.

Unless Hollande can fast turn around an economy currently bleeding more than 40,000 jobs per month, labor discord is guaranteed to grow more frequent.

That will give yet more fodder for far-left firebrands such as Jean-Luc Melenchon, who placed fourth in France's May presidential election. He has been escalating his attacks on Hollande, accusing him of "betraying" French workers.

(Additional reporting By Emmanuel Jarry and Mark John; editing by Mark John/Mark Heinrich)