UPDATE 3-Former Vivendi boss to run France's Thales
* Jean-Bernard Levy to become CEO of French arms firm
* Levy left Vivendi in June in strategy dispute
* Dassault chief dismisses grand French defence merger
* Thales shares fall amid investor nerves over switch
By Cyril Altmeyer and Tim Hepher
ISTRES, France/PARIS, Dec 19 (Reuters) - Jean-Bernard Levy emerged on Wednesday as the next chief executive of French arms firm Thales, months after a strategy dispute cost him his job as head of media and telecoms group Vivendi.
It is the second shake-up in the French defence industry in as many days, after the nomination of a new leader of key Thales shareholder Dassault Aviation, and ends an unhappy three-year reign for Luc Vigneron whose hiring and firing won him enemies.
On Tuesday, Dassault said Eric Trappier, the head of its international operations, would take over as CEO when Edelstenne reaches retirement age in January.
Despite outward appearances of a changing of the guard, both moves underscore the enduring influence of outgoing Dassault CEO Charles Edelstenne and could take the edge off speculation of a sudden wave of French defence mergers, industry sources said.
"Charles Edelstenne chose his own successor and then anointed the new head of Thales before stepping down. It demonstrates one thing, that Edelstenne is stronger than ever," said a French industry source, asking not to be named.
Edelstenne, who opposes talk of a "France Aerospace" conglomerate including Thales, announced Levy's appointment to reporters at a drone demonstration in southern France without waiting for a Thales board meeting due on Thursday.
Levy stepped down in June as CEO of "World of Warcraft" video game maker Vivendi over a strategy dispute with the French company's supervisory board.
Edelstenne said the 57-year-old telecoms engineer's first task would be to restore calm to Thales after months of conflict at the maker of warplane parts and air traffic systems.
Only then would Dassault assess the future of Thales together with the French government, which co-operates with Dassault in a shareholder pact.
"It is necessary that he brings calm back into the company and then that he starts working," Edelstenne said.
The French state and Dassault Aviation own 27 and 26 percent of Thales respectively.
"FORGET" GRAND DEFENCE MERGER
Vigneron faced attacks on his management and had struggled with the unions after an executive reshuffle in July.
His successor, who went to high school with French President Francois Hollande just outside Paris, is a former aide to conservative politician Gerard Longuet but has managed to avoid being labeled as a member of one political camp or the other.
Levy graduated from France's top engineering school with a bias towards telecoms, but developed and maintained connections in defence after working for the space affiliate of Matra, the missile maker owned by Lagardere that later went on to found Airbus parent EADS.
At Vivendi, he gained experience in deal-making by helping sell assets to reduce debt and buy telecom units in Brazil and Morocco to fuel its subsequent overseas expansion.
But Edelstenne sought to pre-empt any speculation that Levy would plunge into a grand merger of French aerospace and defence companies, something the industry has chatted about for months.
Laurent Dassault, a member of the family that controls the business-to-combat jet maker, was quoted in October as saying he supported a tie-up between French companies Dassault, Thales, Safran and Zodiac Aerospace.
Without referring specifically to these remarks, Edelstenne told reporters: "I know this idea has come from somewhere. I have a piece of advice for you: Forget it." The 74-year-old will remain on the Dassault board after stepping down in January.
Industry sources suggest Dassault opposes Thales merging with the larger Safran unless it can play the controlling role.
The changes also leave questions over a tie-up between Thales and French state arms firm Nexter, which Vigneron backed.
Thales shares fell 2.4 percent amid uncertainty over the company's direction under the new leadership.
"Investors may worry that Vigneron is going because something has gone wrong which we have not yet heard about," said UK-based Agency Partners analyst Nick Cunningham.
"I suspect it is more of a stab-in-the-back but the fall in the stock may reflect that concern," he said, adding that to outside investors the unpredictable ups and downs of French defence leaders sometimes resembled the "lives of the Borgias".
Another defence analyst, who asked not to be identified, said that after a slow start, Vigneron was beginning to win over investors. Thales shares have risen 15 percent this year.
Shares in state-controlled aerospace group Safran, many of whose independent shareholders are, according to analysts, skeptical over a merger with Thales, closed up 0.7 percent.