UPDATE 2-Costs, delays scupper Airbus A400M sale to S.Africa

* Cancels $5.2 bln deal to buy 8 planes

* Government says unaffordable burden on taxpayer

* Still seeking military air transport alternatives

* Shares in Airbus parent EADS (EAD.PA) flat

(Adds Airbus, defence minister, analyst quotes)

By Wendell Roelf

CAPE TOWN, Nov 5 (Reuters) - South Africa cancelled a $5.2 billion contract to buy eight Airbus A400M military transport aircraft due to rising costs and delivery delays, cabinet spokesman Themba Maseko said on Thursday.

The move is a setback for the European planemaker, which appeared caught off guard by the decision, and could hand business to U.S. rivals eager to pounce on delays and uncertainty surrounding Europe's largest defence project.

"We have terminated the contract with Airbus but we've not terminated our quest to ensure we have the necessary capabilities. That is very clear," South African Defence Minister Lindiwe Sisulu said.

"We have as one of our priorities the acquisition of strategic military air transport capability."

Shares in Airbus parent EADS initially fell 1 percent but recovered ground to trade almost flat on the day at 13.23 euros.

"We cannot comment at this point of time. We have just learned this from the media," Airbus spokesman Stefan Schaffrath said.

The cancellation comes at a time when EADS is in the final stages of negotiating a rescue package for the rest of the 20 billion euro A400M project with a core group of European buyers, some of whom have also threatened to trim or cancel orders.

Lockheed Martin (LMT.N), producer of the veteran C-130 airlifter, has predicted extra sales due to A400M delays, which have mainly been blamed on engine software problems.

Launched after almost two decades of debate over European requirements in 2003, the A400M is designed to drop troops and heavy equipment in combat zones or disaster areas.

Britain, France, Germany, Belgium, Luxembourg and Turkey ordered 180 planes in Europe's largest single arms procurement deal. Export sales to South Africa and Malaysia brought the total order tally to 192 but Chile cancelled an order.