UPDATE 1-Ryanair seeks EU okay for third Aer Lingus bid

* EU Commission sets Aug. 29 deadline for decision

* Aer Lingus urged shareholders to reject 694 mln euro offer

* Combined group would control 80 percent of UK-Ireland trafic (Adds Ryanair, Aer Lingus, lawyer comments, shares)

By Foo Yun Chee

BRUSSELS, July 26 (Reuters) - Budget airline Ryanair has asked EU antitrust regulators to approve its 694 million euros ($841 million) takeover bid -- its third -- for Ireland's Aer Lingus, in what could be an uphill battle after an EU veto against a previous offer.

The European Commission, which acts as EU competition watchdog, said on its website on Thursday it would decide by Aug. 29 whether to clear the deal.

Ryanair, the largest shareholder in Aer Lingus with a 30 percent holding, notified the EU watchdog of its bid on Tuesday.

Aer Lingus, in which the Irish government holds a 25 percent stake, has urged shareholders to reject Ryanair's offer and said the Commission was likely to block it.

The former Irish flag carrier and Ryanair declined to comment on Thursday. Ryanair shares were up 0.8 percent o 3.88 euros by 0954 GMT while Aer Lingus was 0.2 percent higher at 1.05 euros.

Ryanair is likely to have a tough time with EU regulators, said Goetz Drauz, a partner at law firm Wilson Sonsini.

"It will be difficult to convince the Commission. The Commission has a destination by destination approach which means a high combined market share is not acceptable. This is likely to go into phase 2," Drauz said, referring to a lengthy review.

"Unless Ryanair finds convincing upfront buyers for its slots, it may not have a chance," he said.

The combined carrier would control 80 percent of traffic between the UK and Ireland.

The EU executive blocked Ryanair's 2007 attempted takeover of Aer Lingus, saying the combined group would monopolise or dominate 35 routes, leading to consumers paying more. It said Ryanair had not offered to give up enough airport slots to allay its concerns.

Ryanair dropped its second offer in 2009.

Britain's Competition Commission is now investigating Ryanair's minority stake in Aer Lingus while the UK Office of Fair Trading has said that the holding threatens competition in the sector.

Another shareholder in Aer Lingus is Abu Dhabi's Etihad, with a 3 percent holding. ($1=0.8248 euros) (Additional reporting by Lorraine Turner in Dublin; Editing by Rex Merrifield and Mike Nesbit)