EU wants Austrian Air to shrink before Lufthansa deal-paper

FRANKFURT, June 30 (Reuters) - The European Commission wants Austrian Airlines AUAV.VI to shrink its business by 20 percent before it can allow a takeover by Deutsche Lufthansa (LHAG.DE), Austrian newspaper Der Standard said on its Web site Tuesday.

EU Competition commissioner Neelie Kroes wants Austrian Airlines to shrink its passenger traffic by a fifth by 2010 when compared with 2008 levels, the paper said, citing an EU commission proposal.

The passenger traffic in its charter business should be reduced by half, the paper said.

Lufthansa agreed in December to buy state-controlled AUA in a deal incorporating 500 million euros ($700 million) in aid from the Austrian government to reduce the loss-making airline's 1 billion euro debt pile.

Both the acquisition itself and the state aid require EU antitrust approval.

Lufthansa has said from the outset that it would walk away from the deal if EU conditions were too onerous. Chief Executive Wolfgang Mayrhuber has said he was not interested in buying what he called a "little AUA."

EU representatives could not immediately be reached for comment. (Reporting by Edward Taylor, editing by Gerald E. McCormick)