EXCLUSIVE-Germany nears decision to beef up short-range air defences - sources

(Fixes dateline to Jan 24. No changes to text)

* Defence systems gap has caused concern among NATO members

* Procurement programme 460 million euros - source

* Germany under pressure from Trump to up military spending

By Andrea Shalal

BERLIN, Jan 24 (Reuters) - Germany is nearing a decision to replace its aging short-range air defence systems and help fill a gap that has caused concern among NATO members after Russia's annexation of Crimea, two sources familiar with the issue said.

A decision to move ahead would pave the way for a procurement programme valued at 460 million euros through the middle of the next decade, with 2 billion euros in further spending likely in a later phase, said one of the sources. New (KOSDAQ: 160550.KQ - news) lasers and radars could be added later at additional cost.

A spokesman said the Defence Ministry had taken an initial look at the issue but had not yet made a decision about how to proceed.

One of the sources said officials had a favourable view of a system developed for Sweden by Diehl Defense, a privately held German weapons maker, which includes a variant of its IRIS-T missile and a dual-cab tracked vehicle built by Hagglunds Vehicle AB, a unit of BAE Systems (LSE: BA.L - news) .

Diehl's IRIS-T missile, used by Germany for its Eurofighter Typhoon fighter jets, could be adapted for ground-based launch with a software change. The company also builds a longer-range IRIS-T SLS for Sweden's programme designed for surface-to-air use.

A spokesman for Diehl declined to comment on the expected decision. Diehl submitted a separate proposal to build a missile for a medium-range air and missile defence system that the German government is evaluating.

Once the decision is finalised, the Defence Ministry will map out its functional requirements, to be completed in May, the source said. That would be followed by development of a formal acquisition strategy.

GROWING GAP

U.S. and German military officials last year identified a growing gap in short-range air defence weapons, or SHORAD, in Europe, including the ability to defend against a swarm of unmanned aircraft or drones.

Germany, under pressure from U.S. President Donald Trump to increase military spending, also identified missile defence as a priority in a 2016 white paper and is working with the Netherlands to better coordinate NATO air and missile defences.

Acquisition decisions on the new short-range air defence equipment are not expected until 2018 or later, but the ministry could add some 20 million euros to the defence budget this year to fund initial work on the programme, the sources said.

Current plans call for Germany to buy new equipment for short- and extremely-short range air defence for all 16 of its existing fire units, according to one of the sources.

U.S. weapons maker Raytheon Co builds an alternative to Diehl's system called Network Centric Air Defence System together with Norway's Kongsberg Gruppen (LSE: 0F08.L - news) , which has been sold to Norway, Spain, the Netherlands, the United States, Finland, Oman and an undisclosed country, according to Raytheon's website.

Both sources said German officials had flagged their plans to NATO officials, who welcomed the move.

"It's great news for Germany and NATO that Germany is moving ahead to increase its short-range air defences," said one military official familiar with NATO's needs.

Belgium and Slovakia were also looking to increase their short-range air defence capabilities, said one of the sources.

Thomas Karako, senior fellow at the Washington-based Center (Shanghai: 603098.SS - news) for Strategic & International Studies, said there was growing demand for air and missile defence capabilities to hedge against airborne threats to NATO, including those from Russia.

It was also critical to better integrate air and missile defences across the alliance.

"NATO countries have been aware of the integrated air and missile defence challenge for some time," he said. "We have to get on it, but we're not there yet." (Reporting by Andrea Shalal; Additional reporting by Sabine Siebold; Editing by Janet Lawrence)