German minister tells embattled arms industry to consolidate

* Berlin has vowed to curb exports to non-allied states

* Germany is world's third largest exporter

* New curbs come at time of reduced EU arms spending (Adds quotes, background, detail)

By Sabine Siebold

BERLIN, Aug 19 (Reuters) - Germany's economy minister told the country's arms industry on Tuesday that its future lay in consolidation with European peers, making clear that years of expansive exports were over.

Sigmar Gabriel's comments come two months after he announced he would tighten rules on arms exports, curbing sales to states such as Qatar and Saudi Arabia, whose purchases had previously helped make Germany the world's third largest arms exporter.

"The German arms industry's perspectives do not depend on exports alone, and certainly not just on exports to the Arabian peninsula," Gabriel, a Social Democrat, said after meeting the heads of workers' councils at German defense industry firms.

"We need to talk about European consolidation, maintenance and renewal of stocks," he added.

His comments seem at odds with Berlin's stance of just two years ago, when Germany blocked plans for a $45 billion merger between Franco-German aerospace group EADS, now known as Airbus , and British defence contractor BAE Systems (LSE: BA.L - news) amid fears that Germany might lose influence and jobs.

Germany's arms industry directly employs some 80,000 people. Exports rose 24 percent to 5.85 billion euros in 2013 from 2012 - triggering a public backlash over sales to volatile regions.

Mindful of shrinking European defence budgets, French and German tankmakers Nexter and Krauss-Maffei Wegmann said in July that they were in merger talks. Industry insiders say the move was accelerated by Gabriel's new export restrictions.

Gabriel said it made no sense to have different European firms making the same kinds of weapons, or to have different EU armies all using different equipment.

JOB SECURITY

France has long called for greater European defence cooperation, but competing national interests and divergent export policies have often got in the way.

German firms have complained that Gabriel's more restrictive arms policy has already held up thousands of export permit applications. They say it risks deterring buyers from choosing German products and will hurt business.

The minister is due to hold talks with executives and unions from the entire sector in early September.

Gabriel stressed on Tuesday that questions of job security would have no bearing on decisions on whether to allow exports, and repeated that political circumstances in some parts of the world ruled out arms sales completely.

He said the world was experiencing the opening of a "Pandora (Other OTC: PNDZF - news) 's box" in Iraq, stuffed full of weapons supplied by both the East and West. "Now (NYSE: DNOW - news) we have the dilemma of whether we should send more weapons in order to save lives," Gabriel said.

Ernst-August Kiel, head of the works council of submarine maker ThyssenKrupp Marine Systems, welcomed the meeting with Gabriel and said the arms sector wanted clarity on policy, particularly as building times are so long.

He said the industry would seek to diversify into civilian products to ensure greater job security.

One of Chancellor Angela Merkel's main allies in parliament, Christian Democrat Volker Kauder, suggested last weekend that Europe should adopt common arms export regulations, to ensure that Germany was not disadvantaged. (Reporting by Sabine Siebold; Writing by Madeline Chambers and Alexandra Hudson; Editing by Noah Barkin and Crispian Balmer)