* Dassault, Airbus in dispute over control of project

* Macron, Merz to discuss matter on sidelines of EU

summit, sources say

* Reshuffling of Europe's defense industry possible if

FCAS collapses

By Sabine Siebold, Tim Hepher and Michel Rose

BERLIN/PARIS, March 17 (Reuters) - Leaders of France and

Germany will discuss the crisis-hit FCAS fighter programme on

the sidelines of a European Union summit on Wednesday, three

people familiar with the matter said.

Plans to develop a futuristic air combat system together

with Spain are hanging by a thread amid a public dispute over

control between France's Dassault Aviation and Airbus, which

represents Germany and Spain in the 100-billion-euro project.

The office of French President Emmanuel Macron confirmed that he

and German Chancellor Friedrich Merz would meet on Wednesday

evening ahead of the March 19-20 summit but declined to say

whether they would discuss FCAS. A German government source said

FCAS was among the topics up for discussion.

Macron co-launched the project with then-German Chancellor

Angela Merkel in 2017, with Spain joining later.

German Foreign Minister Johann ​Wadephul said he was

optimistic Berlin and Paris would continue to work together on

all important European topics including security. Germany's BDLI

aerospace industry association called for "a fighter under

German leadership as part of a restructuring of FCAS".

Current plans call for a digitally connected array of

crewed fighters and combat drones to replace the Dassault Rafale

and Airbus-backed Eurofighter from 2040. Manufacturers have

fallen out over the next phase involving a flying demonstrator.

Dassault is pressing for clearer control of the core fighter

part of the project, including choice of suppliers, while

offering the same latitude to Airbus on the parts where it is

already nominally in the lead. Airbus has said existing accords

calling for equality between partners should be kept.

COMPANY FRICTION

Relations between the two groups have soured to the point

that few involved in the project believe it will go ahead, but

any final decision must be made by national leaders, with Macron

widely seen as resisting German industry calls to halt the work.

Speaking during a visit to New Delhi last month, Macron

dismissed the prospect that industrial disputes could overshadow

government decisions on the development of strategic weapons.

"There have been frictions between companies; that's the

life of business and of human organisations. But should that

decide the strategy of states? The answer is no," he told a news

conference.

A collapse of the Franco-German-Spanish project, also known

by its French initials SCAF, is likely to trigger a reshuffling

of alliances in Europe's fragmented defence industry.

Until now, Germany has co-operated on modern fighter

developments with Britain, which this time is involved in the

competing GCAP fighter project alongside Japan and Italy.

Sweden, which makes the independent Saab Gripen,

is analysing its own future in the fighter market and is also

seen as a potential partner for Airbus if FCAS collapses.