UPDATE 1-ThyssenKrupp in talks to sell Swedish naval shipyard to Saab
* Talks on new sub between Sweden and Thyssen broke down
* Saab says deal in line with naval expansion plans
* Negotiations at early stage (Adds background, quote, shares)
STOCKHOLM, April 14 (Reuters) - ThyssenKrupp is in talks to sell its Swedish marine defence unit to Saab after failing to reach a deal with Sweden for a new generation of submarines as the country tries to protect its defence manufacturing sector.
Sweden had been seeking ways to share development costs with other potential buyers of its A-26 submarine but failed to agree on commercial terms with ThyssenKrupp, which also builds submarines in a separate business in Germany.
Sweden saw the German company as a potential obstacle to the growth of the Swedish business in favour of its German unit. The government asked Saab earlier this year to come up with a strategy to support Swedish submarine naval forces.
Defence analysts saw the move as opening the door for the Swedish defence company to build submarines instead.
The companies said on Monday that negotiations over the sale of ThyssenKrupp's Swedish shipyard with operations in Malmo, Karlskrona and Musko to Saab were at an early stage and that more information would follow.
Saab, maker of Gripen fighter jets and military equipment ranging from grenade launchers to radar systems, said the deal was in line with its ambition to expand its naval activities and help Sweden meet its needs for the design, production and maintenance of submarines and warships.
"An acquisition of ThyssenKrupp Marine Systems will enable Saab to meet this ambition," it said in a statement.
In a bid to build up its own submarine making ability, Saab has poached dozens of key staff from ThyssenKrupp's Swedish business in recent months, said sources at both firms, declining to be identified as they were not authorised to speak publicly on the matter.
Playing in Saab's favour was the fact that ThyssenKrupp's German business won a deal a little over a year ago to build two customised submarines for Singapore, despite its Swedish operations having previous relations with the Asian city state.
Jan Joel Andersson, a senior research fellow at the Swedish Institute of International Affairs, said the Swedish affiliate had maintained a relationship with Singapore for more than 20 years and that the decision had angered the government.
The government said in its spring budget last week that it was not possible to reach an agreement on the construction of the A-26 submarine or the mid-term modification of the Gotland sub.
ThyssenKrupp Marine employs around 1,000 staff in Sweden, mainly in the southern Swedish cities of Malmo and Karlskrona. The Marine Systems unit, which also makes naval ships, posted sales of 1.33 billion euros last year.
Swedish investment firm Investor AB owns a 30 percent stake in Saab, whose shares were down 1.2 percent at 1322 GMT compared with a broadly unchanged Stockholm blue-chip bourse index. (Reporting by Mia Shanley and Bjorn Rundstrom, additional reporting by Maria Sheahan in Frankfurt; editing by Tom Pfeiffer)