UPDATE 1-Fonterra and Danone in talks over food scare dispute

Wed Oct 2, 2013 5:53am EDT

(Adds background, details)

* Fonterra denies any legal liability to Danone

* Danone warned that recall would hit Q3 sales

By Naomi Tajitsu

WELLINGTON, Oct 2 (Reuters) - New Zealand's Fonterra , the world's biggest dairy exporter, said it is in talks to resolve a dispute with Danone over a contamination scare involving a Fonterra ingredient used by the French food manufacturer.

The discussions follow a food safety scare in August, when Fonterra said it found a potentially fatal bacteria in one of its products, triggering recalls of infant milk formula and sports drinks in nine countries including China.

Danone-owned brands were affected and the company issued a recall of its Dumex milk formula products containing the affected ingredient in China, while its Nutricia brand of milk formula was taken off supermarket shelves in New Zealand.

New Zealand's Ministry for Primary Industries later said that tests showed that the botulism scare had been a false alarm because whey protein concentrate made by Fonterra contained a less harmful bacteria..

The food safety warning issued by Fonterra and the New Zealand government was lifted on Aug. 28.

"Fonterra confirms that the discussions remain ongoing but strongly denies any legal liability to Danone in relation to the recall," the company said in a statement.

Danone had no immediate comment on Wednesday.

The French company had said on Aug. 30 that the recall would result in a sales fall for its baby food division in the third quarter but that it expected to meet group sales and profit targets for the year..

Danone had also said that it was reviewing its "recourse and compensation options".

Baby food accounts for 20 percent of Danone's revenue, second only to its dairy business, and Asia, notably China, is a key growth market for the group at a time of sluggish demand in Europe.

Fonterra, which controls nearly a third of the world dairy trade and generates about 7 percent of New Zealand's GDP, last week said that it had made a NZ$14 million ($11.6 million) provision for the recall. ($1 = 1.2111 New Zealand dollars)

(Additional reporting by Dominique Vidalon in Paris; Editing by Richard Pullin and David Goodman)