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NEW DELHI/PARIS (Reuters) - The French-built Rafale emerged on Tuesday as preferred bidder in a $15 billion contest to supply India with 126 warplanes, lifting hopes for a sale that would boost France's national pride and restore the lustre of its aviation sector.
India's decision to enter exclusive talks with supplier Dassault Aviation also provides a welcome boost for President Nicolas Sarkozy, whose chances of being re-elected this year hinge partly on his credibility as a champion of French industry.
Developed over decades at huge expense, the Rafale is a powerful symbol of French technological prowess. Its sale to India over strong European rivals would be received as a victory for national prestige, as well as a commercial boon.
But Sarkozy, currently projected to lose an April-May presidential election, cannot claim credit too soon. Previous attempts to sell the Rafale have failed to produce firm deals. India has cancelled defence procurement decisions in the past.
"We've been waiting for this day for thirty years," Sarkozy told a news conference, referring to the launch of Rafale's development programme. Having "126 Rafales in the final phase (of talks) in India concerns more than aviation... It's a signal of confidence in the entire French economy."
While exclusive talks are not a guarantee of sale, they deal a probable knockout blow to Rafale's chief rival in India, the Eurofighter Typhoon, a fighter plane developed by a consortium of four European aviation companies -- the German and Spanish branches of EADS, Britain's BAE Systems and Italy's Finmeccanica.
James Hardy, Asia Pacific specialist at IHS Jane's Defence Weekly said Dassault's poll position in India was a big blow for Eurofighter.
"The Typhoon was widely tipped to be the favourite and had major political support from the big beasts of the Eurofighter nations," he said. "Both Germany and the U.K. invested a lot of time in pushing the Typhoon so this will hurt."
India rejected American, Russian and Swedish bids in April.
India, which owns more than 50 French Mirage jets, has become the world's largest importer of weapons as it seeks to upgrade its largely Soviet-era navy and air force to counter the rising might of China and threats from Pakistan.
"The Rafale gives a huge combat edge to our air force given the situation in our region," said former Indian air force chief Fali Homi Major.
"We cannot say what kind of conflict situation there would be in the region 20 years hence."
If it came off, the deal would also be a major shot in the arm for Dassault, which has struggled to find a foreign buyer and assure production for the multi-role Rafale, billed as one of the most effective fighters but also one of the costliest.
The Rafale and Eurofighter Typhoon both waged combat missions in Libya last year, a conflict also seen as a prime showcase for potential weapons sales.
Shares in the thinly traded stock of Dassault Aviation shot up 22 percent to a more than four-year high of 749 euros after the announcement.
However, India's Defence Minister A.K. Antony said earlier no deal would be signed before the end of March.
"It is a long process. The file has not come to my table," Antony said, adding that the finance ministry and then a cabinet panel headed by the prime minister had to look at any agreement.
A French source close to the matter said the decision to enter fresh negotiations with lowest-bidder Dassault, in exchange for a transfer of technology, was a step forward but that no deal had been signed.
Defence analysts said the deal needed to get through a potentially complex final stage of talks in which France's willingness to transfer know-how would be tested to the full.
"This is not the end of the road by any stretch of the imagination. This is only the beginning of a second stage of this campaign," said veteran defence analyst Howard Wheeldon, senior strategist at BGC Partners brokerage in London.
Hardy said wrangling over the deal could go on for years.
"Financial pressures on India's government could seriously complicate the chances of this being signed any time soon, in particular the depreciation of the rupee," he said. "That and the standard contractual wrangling that occurs during Indian procurement deals could cause delays stretching to years."
Indian defence ministry sources said the life-time cost of the tender, including training and maintenance could reach $15 billion, above previous estimates of around $11 billion.
The sources said the Rafale was preferred because it cost about $5 million less per plane and the Indian airforce was familiar with French warplanes such as the Mirage.
In 2011, Dassault won a $1.4 billion contract to upgrade India's Mirage fleet.
A source familiar with the negotiations said the defence ministry was considering extending the tender to buy an additional 80 or so jets and that bidders excluded earlier in the race might be allowed to take part.
Analysts say such a move could notably open the door to the Lockheed Martin F-35, the most sophisticated fighter currently exported by the United States. In November, Washington expressed interest in selling the stealth aircraft to India.
In December, French Defence Minister Gerard Longuet warned that Dassault would stop production of the Rafale in 2021 if it did not win any export orders.
A deal in the works since 2008 to sell 60 fighters to the United Arab Emirates hit a new snag last year when Abu Dhabi Crown Prince Sheikh Mohamed bin Zayed called Dassault's terms "uncompetitive and unworkable".
The UAE has since sought details of the Typhoon.
Additional reporting by Arup Roychoudhury, Tim Hepher, Nigam Prust and Andrea Shalal-Esa; Writing by Frank Jack Daniel and Nick Vinocur; Editing by John Chalmers and Helen Massy-Beresford