UPDATE 2-Rheinmetall to agree production start for Algerian military vehicles-paper
* Rheinmetall to sign contract in coming weeks - paper
* To make Fuchs military vehicles in Algeria - paper
* Contract is part of 10 bln euro deal approved in 2011
* Rheinmetall shares pare gains (Adds economy ministry and Merkel's comments)
FRANKFURT, June 18 (Reuters) - German defence group Rheinmetall is set to sign a 2.7 billion-euro ($3.7 billion) contract in the coming weeks to start production of Fuchs military vehicles for Algeria, German business newspaper Handelsblatt said on Wednesday.
The deal is part of a package of arms contracts with Algeria worth 10 billion euros that was approved by the German government in 2011.
At the time industry sources told Reuters that Rheinmetall's joint venture RMMV was to build Fuchs vehicles, while Daimler would sell trucks and off-road vehicles and ThyssenKrupp would build frigates for Algeria.
According to Handelsblatt, there has been concern in recent years about the risk of terrorist attacks and kidnappings in Algeria, but the groundwork has now been done for the new factory where more than 900 Fuchs vehicles are to be built.
Rheinmetall, ThyssenKrupp and Germany's Economy Ministry declined to comment directly on the report. Daimler said production of truck and bus parts in Algeria started this year.
Tobias Duenow, a spokesman for the German Economy Ministry said while there had been many media reports on German arms deals with Algeria of late, the approvals had been issued by the previous German government.
"In the context of this complex, the Economy Ministry does not currently have any applications for export permits so that means there are no permits pending," he said.
Shares in Rheinmetall earlier rose as much as 3.6 percent to the top of Germany's mid-cap index but had pared gains to trade 2.16 percent higher at 52.02 euros by 1439 GMT.
Chancellor Angela Merkel said on Wednesday Algeria played an important role in fighting extremists but avoided commenting on the report about the Rheinmetall deal.
In a news conference with Tunisian Prime Minister Mehdi Jomaa in Berlin, Merkel offered him German help training the police and delivering bulletproof vests to boost security on the border with Libya to stop Islamist militants infiltrating border regions.
"It is in all of our interests that Tunisia is able to continue on a stable path," said the German leader. ($1=0.7345 euros) (Reporting by Harro ten Wolde and Maria Sheahan; Additional reporting by Tom Kaeckenhoff, Anneli Palmen, Ilona Wissenbach and Berlin bureau; Editing by Mark Potter and Greg Mahlich)