France won't rule out bigger EADS-BAE stake: source

France will not rule out buying shares from Lagardere that would raise its stake in a merger of EADS and BAE , a French government source said on Friday, raising the prospect of a deal-breaking clash with Britain.

The source, speaking on condition of anonymity, doubted a deal could be reached on the planned mega-merger of the European aerospace group and UK defense firm by an October 10 regulatory deadline and expected that date to be extended by 28 days.

"The governments of France, Germany and Britain still disagree concerning the level of German and French stakes but discussions are continuing," said the source, adding: "This is a normal phase in the negotiations."

Speaking on the margins of a summit in Malta, French President Francois Hollande signaled that the companies involved would have to take into account the views of the governments involved.

"We have said what we consider to be the conditions," Hollande told reporters at a summit of North African and European countries. "After that it's up to the companies to continue their talks or negotiations knowing France's position."

France already has a 15 percent stake in EADS and the government source said it "wishes to give itself the option" of purchasing a 7.5 percent stake in EADS which diversified holding company Lagardere wants to sell.

Britain in particular wants France to forego that right in order to make the deal more presentable to authorities in the United States, where BAE earns nearly half of its revenue.

(Reporting by Emmanuel Jarry and Julien Ponthus; editing by Mark John)