UPDATE 1-Ex-spy chief to help Safran run U.S. firm

* Completes purchase of U.S.-based L-1 at $12 a share

* Safran names former security deputy to L-1 proxy board

* Safran says deal makes it world leader in biometrics

* Safran shares fall 1 percent in weaker market

(Recasts, adds details, background)

By Tim Hepher

PARIS, July 26 (Reuters) - France's Safran completed a $1 billion purchase of U.S. face-recognition software maker L-1 Identity Solutions after hiring a top former U.S. intelligence official to allay security concerns.

The $1 billion cash deal gives the French state-owned company control of a Connecticut company which specialises in biometric recognition systems, passports and finger-printing as well as background checks for public and private clients.

Safran said the $1.09 billion cash purchase would make it the world's leader in biometric identification, which relies on scanning unique features of the body such as face or iris.

Demand for better ways of weeding out human threats rose sharply after the Sept 11, 2001, attacks in the United States.

The takeover deal, first announced in September, values L-1 at $12 a share, which matched the closing price on Monday.

Its completion follows a probe by a U.S. panel responsible for vetting foreign takeovers of firms in sensitive industries.

Safran said on Tuesday it had agreed to set up a three-person proxy board to manage sensitive U.S. contracts that make up about 80 percent of L-1's business. Such a device is common when security assets come under foreign economic control.

The proposed proxy board would include Barbara McNamara, a former deputy director of the code-cracking National Security Agency, and William Schneider Jr, a former undersecretary of state under President Ronald Reagan and a former member of the Rumsfeld Commission that assessed ballistic threats. Their appointments have yet to be approved by the U.S. government.

The presence of McNamara, formerly the top civilian in one of the most secretive areas of U.S. government, responsible for eavesdropping foreign communications, and Schneider is designed to ensure L-1 can keep open its lifeline of U.S. contracts while having the French government as its largest single shareholder.

McNamara, who once warned Congress about the threat posed by uncontrolled exports of commercial encryption software, also faced flak over U.S. readiness for 9/11 but said she was painted as an enemy of change at the NSA because she opposed changes in law.

Safran's existing security business, known as Morpho, lists encryption software and equipment among its businesses.

BUSINESS GROWING

The L-1 deal reflects efforts by Safran to build a "third pillar" in the fast-growing security industry alongside its core businesses making jet engines and supplying France's military.

Safran shares fell 1 percent in a weaker market to 29 euros.

The deal involves the latest in a string of mid-tier security and defence companies that have been snapped up by traditional suppliers.

As top contractors face tumbling defence budgets, they are looking to acquire smaller companies with niche technologies in cyber security, civil security, surveillance and intelligence -- a deliberate shift in focus from bombs to bytes.

Under the deal, Safran paid $1.09 billion in cash for L-1 and its core biometrics business. L-1's government consultancy business was acquired by Britain's BAE Systems .

The use of biometrics is spreading due to security fears but privacy concerns have slowed their adoption in some markets.

Despite this, L-1 has noted in filings that it has a "history of operating losses" as it makes vital investments.

It posted a wider net attributable loss of $10.8 million or 12 cents per share in the first quarter and was due to have published second-quarter earnings later this week.

Safran Finance Director Ross McInnes declined to comment on the company's past performance but was optimistic on the future.

"The main point is the business is growing in the world's largest market in its field," he said in a conference call.

Safran said L-1, whose products are used by border security agencies and by financial institutions, would join Safran's existing Morpho business and would be renamed Morpho Trust.

It forecast $30 million of synergies within 18-24 months.

Analysts said Safran was buying the company for its access to technology and markets rather than a quick financial win.

"Most of the big investment requirements (at L-1) are behind us. They have technologies to complete the range at Safran and they are in a business where you need volume to be successful," said Oddo Securities analyst Yan Derocles.

* FACTBOX on biometric identification .

(Editing by Elaine Hardcastle)