Amid austerity, EU agrees to boost defence cooperation

* Cooperation drive is response to austerity

* UK's Cameron says will resist European army

* NATO chief warns U.S., Europe could drift apart (adds comments)

By Adrian Croft

BRUSSELS, Dec 19 (Reuters) - European Union leaders agreed on Thursday to work more closely on defence and make falling military budgets stretch further, but British Prime Minister David Cameron said London would resist any attempt to form a European army.

French President Francois Hollande won a promise that the EU would review the financing of EU overseas missions, but failed to win any concessions on the EU providing financial help for French military missions in Africa, diplomats said.

Austerity-hit EU countries have slashed spending in response to the financial crisis, scaling back on ships, tanks and fighter jets and undermining Europe's military strength, much to the concern of the United States, its most important ally.

EU leaders, discussing defence at a summit for the first time in five years, called on member states to work together to spread the cost of developing expensive military kit and urged them to ensure a level playing field for EU companies selling military equipment across European borders.

They pledged to launch projects to develop a European drone and to look into a new generation of government satellite communications.

They also promised to work to increase the continent's air-to-air refuelling capacity, after the 2011 Libya conflict demonstrated a European shortage of tanker aircraft, and to strengthen cyber defence.

Cameron said Britain, one of Europe's most capable military powers but one that has also scaled back spending, would support cooperation but drew the line at a European army.

"It isn't right for the European Union to have capabilities, armies, air forces and the rest of it. We need to get that demarcation correct between cooperation which is right and EU capabilities, which is wrong," he told reporters.

The EU's executive Commission has raised the possibility that the EU itself could buy and operate some equipment needed for military missions, such as surveillance drones.

Cameron secured an amendment to the summit communique making clear that EU member states would operate any new equipment, such as drones or tanker aircraft, diplomats said.

SUSPICIOUS

Britain has always been suspicious of giving too big a military role to the EU, fearing it could undermine NATO.

NATO Secretary-General Anders Fogh Rasmussen, who joined the EU leaders for the talks, said he saw no contradiction between a stronger European defence and a strong NATO.

He urged Europeans to act to strengthen their defence, warning: "Unless we recommit to our own defence we risk seeing America disengage and Europe and America drift apart."

France, which has deployed 1,600 troops in Central African Republic to prevent worsening violence between Christian militias and largely Muslim Seleka rebels, has called for a permanent EU fund to be set up to finance military interventions like the French actions in Central African Republic and Mali.

While some European governments have lent logistical support, the funding proposal has received scant sympathy so far from France's EU allies, who said the bloc's funds could only be used to finance EU military missions, not national ones.

"I have received a lot of support from almost all European governments. And so financing must also follow this political support," Hollande told reporters on his way in to the meeting.

Aware (NasdaqGM: AWRE - news) his proposal stood little chance of success, Hollande did not raise the proposal directly, but told fellow EU leaders there was a need to look at financing for future missions, diplomats said.

Under a change France secured to the communique, EU foreign policy chief Catherine Ashton will draw up a report on improving the system of financing EU overseas operations.

EU officials say the bloc could consider sending a future mission to Central African Republic, possibly a military training mission similar to the one it set up in Mali. (Additional reporting by Paul Taylor, Robert-Jan Bartunek; editing by Luke Baker)