* ArcelorMittal withdraws French site bid for EU-funded project
* Move throws into question a deal to preserve Florange site
* Steelmaker, govt say agreement intact but locals, unions angry
By Yves Clarisse and Catherine Bremer
PARIS, Dec 6 (Reuters) - A politically charged deal between the French government and ArcelorMittal to preserve jobs at an ailing steelworks looked at risk of unravelling on Thursday after the global steel giant ditched a bid to run an EU-funded project there.
ArcelorMittal, 40-percent owned by India's Mittal family, withdrew an application to use the Florange site in northern France for an EU pilot project in less polluting steel that Paris had hoped could keep two idled blast furnaces going.
ArcelorMittal and Prime Minister Jean-Marc Ayrault said the move did not mean the idea of using Florange for the ULCOS "green steel" project was being permanently abandoned, nor that the deal with the French government had been undone.
But unions and local politicians reacted angrily, with metalworkers threatening to occupy the blast furnaces if the government did not revise its deal with ArcelorMittal, and other employees staging sympathy actions elsewhere.
"We urge Francois Hollande: retake control of this issue,"
CFDT trade union leader Edouard Martin told I>tele news television. "We're going to occupy the factory."
ArcelorMittal, which has been under fire for months in France over its plan to permanently shut its Florange furnaces on the grounds they are not economically viable, said it could not currently pursue the ULCOS project for technical reasons.
"(This) is perfectly coherent with what is in the agreement signed with the French government," the company said, adding: "This in no way means the ULCOS project is being abandoned."
Firebrand leftist Minister for Industrial Revival Arnaud Montebourg raised the stakes last week by declaring Indian steel magnate Lakshmi Mittal unwelcome in France, accusing him of lying and threatening to nationalise the steelworks. He raised workers' hopes that were dashed by last Friday's deal.
Ayrault, whose government was appointed by Francois Hollande after the Socialist was elected president in May, said in a statement that the European Commission had indicated that the project could be pursued in a future tender.
Asked about the deal, Ayrault told the Senate that the government had achieved its goals. "There will be no layoffs: that was the objective we had set for ourself," he said.
Yet in the best case, a potential start-date would now be delayed by several years, throwing into question the idea that ArcelorMittal would keep spending money to keep its mothballed Florange furnaces in viable working order.
In signs of growing anger, metalworkers at ArcelorMittal's Fos-sur-Mer plant in southern France blocked the site's entrances to show solidarity with their peers at Florange. Workers in the plant's finished products section went on strike.
Union leaders at the company's Basse Indre plant in eastern France were also proposing strike action.
"We're angry to see Florange workers and their union representatives treated this way," said Michel Tosi, a CFDT leader at Fos. "They were fooled."
Michel Liegbott, a Socialist lawmaker for the surrounding Moselle region, told BFM television that the government had broken its commitments with regard to Florange.
"We've been conned. They are liars," he said. "They should have said what they are saying today six months or a year ago."
Last week's agreement, under which ArcelorMittal committed to preserve some 630 jobs at the two blast furnaces, was a crucial test of Hollande's pledge to stem a run of industrial layoffs and also revive French competitiveness.
France's unemployment rate hit a new 13-year high of 10.3 percent in the third quarter of the year, data showed on Thursday, piling more pressure on Hollande, who has vowed to halt the rise by the end of 2013.
ArcelorMittal had agreed to invest 180 million euros ($235 million) in Florange and keep the furnaces in working order so they could be used if its application to use the site for the ULCOS project was successful.
ULCOS (Ultra-Low Carbon Dioxide Steelmaking) is a consortium of 48 European companies and other organisations working to develop ways to cut CO2 emissions from steel production in order to curb the greenhouse gases blamed for global warming.
A European Commission spokesman confirmed on Thursday it had received written notification from ArcelorMittal that it had decided to withdraw its bid "due to technical difficulties".