UPDATE 1-Progress in A400M rescue talks -sources

* Progress reported in one of three pillars of talks

* Delays affect 20 billion euros military project

(Adds background)

By Tim Hepher

PARIS, May 11 (Reuters) - Airbus parent EADS (EAD.PA) and European governments have made "progress" in defining the technical specifications of the A400M in a bid to restore production of the delayed military aircraft, sources close to the talks said.

Simplifying the technical requirements is one of three key stumbling blocks in talks between EADS and the seven European NATO countries aimed at rescuing Europe's biggest military project, whose delays have angered Britain and Germany.

Other major debating points include the price of the transport plane -- estimated at about 100 million euros ($131.7 million) each -- and the need to agree a new delivery timetable.

"There has been good progress in defining the technical characteristics," one of the sources said, without elaborating.

An Airbus Military spokeswoman declined to comment.

The A400M, designed to carry troops and heavy equipment to rugged areas such as Afghanistan, was ordered by seven European NATO countries in 2003 for a total cost of 20 billion euros.

The plane was due to be delivered in 2009 but has yet to make its maiden flight.

Development was held up mainly by engine problems but manufacturers also blame a laundry list of customised national requirements such as defensive aids and navigational features.

Germany, for example, wants its 60 prop-driven A400Ms to have the ability to hug the landscape to avoid attack.

According to industry sources, EADS wants to produce a basic version of the plane in the first phase to reduce the development risk, adding more complex features later.

By triggering delay clauses in the contract, the buyers could have cancelled the project on April 1 and ordered EADS to pay back 5.7 billion euros in upfront development costs. But they declared a moratorium until July to allow emergency talks.

EADS has said it will deliver the first A400M three years after its first flight, saying the date for that milestone depends on the readiness of crucial engine software.

Buyers such as Britain, which has threatened to cancel over the delays, and France want their planes as soon as possible to support global operations and renew ageing transport fleets.

Other European buyers include Spain, Belgium, Luxembourg and Turkey. South Africa and Malaysia have agreed to buy export versions but have no role in the current contract negotiations.

EADS is seen as keen to end months of negative publicity and will be under pressure to announce progress on development or relaunch the project in time for the Paris Air Show in mid-June. ($1=.7592 euros) (Reporting by Tim Hepher; editing by Mike Nesbit)