Malaysia says EU palm oil curbs may undermine France's fighter jet bid

* Plane deal could be worth more than $2 billion

* Consortium including Britain's BAE also bidding

* French officials say Paris won't back total ban

* Malaysia has been considering options for years (Adds comments from Dassault Aviation CEO and French officials)

KUALA LUMPUR, March 8 (Reuters) - Malaysia, the world's No.2 producer of palm oil, said on Thursday the European Union's decision to curb imports of the commodity could undermine France's hopes of winning one of Asia's biggest fighter plane deals.

France's Rafale jet, built by Dassault Aviation (LSE: 0IAX.L - news) , has been seen as the frontrunner in Malaysia's plan to buy up to 18 planes in a deal potentially worth more than $2 billion.

But talks hit a snag after EU lawmakers sought to stop the use of palm oil in motor fuels.

Malaysia said this week it would respond with "might and tact" if the EU did not back down on the curbs.

"The jet fighters the French are looking at, the Rafale, are also competing with the Brits who have left the EU. So they have to take that into consideration," Malaysian Defence Minister Hishammuddin Hussein told a news conference.

Malaysia has for several years been considering France's Rafale jet and the Eurofighter Typhoon, built by a European group that includes Britain's BAE Systems (LSE: BA.L - news) to replace Russian MiG-29s that are mostly grounded.

BAE has campaigned hard for almost a decade and has set up a regional office in Kuala Lumpur to press its bid.

Hishammuddin's comments may encourage BAE, whose bid seemed to lose traction after Malaysian Prime Minister Najib Razak said he discussed a possible purchase of Rafale planes during a visit in 2017 by France's then-president, Francois Hollande.

Dassault Chief Executive Eric Trappier said palm oil curbs could "impact relations between several countries" but said talks with Malaysia had been going on "for a long time".

"New (KOSDAQ: 160550.KQ - news) talks will depend on the new government," Trappier told a news conference on the French firm's results.

BAE did not immediately respond to a request for comment.

CHALLENGES AHEAD

Malaysia could lose about $500 million in annual revenue if the EU goes ahead with palm oil curbs, analysts estimate.

It adds to troubles facing Malaysia's prime minister Najib, whose ruling coalition will rely on votes from more than 600,000 palm oil plantation smallholders in elections due by August.

French government sources said France would not back a total ban. "If it is sustainable palm oil then it could be used in biofuels," a French official said. "The idea is to support a constructive and non-discriminatory approach of palm oil."

French Defence Minister Florence Parly said in comments reported by Malaysia's New Straits Times in January that Malaysia "can rely on France" for support against the ban.

Hishammuddin said Malaysia "cannot put a price tag" on its national interests when negotiating bilateral deals.

He said those seeking strong bilateral ties should "not just look at economic considerations separate from other considerations, especially when it come to defence because we do have other options."

A decision on the planes has been delayed due to the approaching election and a shift in Malaysia's focus towards upgrading aerial surveillance capabilities. (Reporting by Joseph Sipalan in Kuala Lumpur; Cyril Altmeyer and Sybille de La Hamaide in Paris Editing by Joseph Radford and Edmund Blair)