* Fonterra says talks on commercial solution dragging on
* Danone says negotiations continue, no further comment
* Danone lost 350 million euros in sales following recall
WELLINGTON/PARIS, Dec 2 (Reuters) - New Zealand dairy exporter Fonterra may face legal action from France's Danone over the recall of infant formula containing a potentially contaminated Fonterra ingredient, the company said on Monday.
In August Fonterra said it had found a potentially fatal ingredient contained in a range of products sold by a number of multinational companies.
After recalls were issued across nine countries including China and Malaysia, the food safety scare turned out to be a false alarm because the ingredient was found to contain a less harmful bacteria.
Danone is seeking full compensation for what it says were 350 million euros ($476 million) in lost sales following the recall of its infant formula products in Asia and New Zealand.
The two sides started negotiations in October to try to resolve the dispute.
"We're still in talks (with Danone)," Fonterra CEO Theo Spierings told Reuters in a telephone interview. "I put a commercial proposition on the table at the end of October and I haven't heard back on that proposition.
"If their counterproposal is commercial, I would of course entertain a commercial discussion. If their reply is legal, then we would have a different discussion."
A Danone spokeswoman told Reuters on Monday the group was "still in talks" with Fonterra and would make no further comment.
In October, Danone said it was taking longer than expected to recover from the recall of high-margin infant formula and cut its sales, profitability and free cash flow goals for 2013.
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.
At an annual meeting of Fonterra's shareholder fund on Monday, the co-operative said negotiations with Danone were dragging on.
"In Danone's case ... we have worked on a commercial solution for months," Spierings said. "That appears to be a route that is not working out."
Fonterra has earmarked NZ$14 million ($11.4 million) to deal with recall-related issues and Spierings said that the funds have yet to be tapped.
Commercial agreements with six of the eight firms affected by the recall have been reached and Spierings said he was "very, very close" to reaching a commercial solution with an affected nutritional company.
U.S. company Abbott Laboratories recalled its infant formula products containing the questionable ingredient in China and Vietnam and the company said it took a $90 million hit in lost sales in the third quarter and expected sales would suffer into the first half of 2014.
Other companies affected by the recall include Coca-Cola China, Chinese beverage maker Wahaha, as well as animal feed and nutritional products manufacturers in Australia and New Zealand.