* BlackBerry Messenger still working early Friday morning
* Research In Motion and Saudis make progress, source says
* Saudi residents have mixed feelings about threatened ban
By Souhail Karam
RIYADH, Aug 6 Thousands of BlackBerry users in Saudi Arabia were waiting early Friday to see if the government would carry out its threat to cut off the device's Messenger service on national security grounds.
Talks between the smartphone's maker, Research In Motion RIM.TORIMM.O, and the Saudi telecom regulator were making progress, a source with direct knowledge of the negotiations said late Thursday.
Even so, the government would proceed with blocking the BlackBerry Messenger function as decreed by the Communications and Information Technology Commission earlier this week, the source said.
"RIM showed on Thursday a degree of flexibility that has not been there over the past three months. Progress is being made. We started debating the technicalities of new setups," the source told Reuters.
RIM is facing mounting pressure to open its super-secure network to government scrutiny. A growing number of countries are demanding access to encrypted communications sent through the device, saying national security may be at risk.
The Saudi talks have led Research In Motion to consider locating a server in the kingdom to handle some of the BlackBerry network's encrypted communications, Al-Hayat newspaper's online edition said on Friday in an unsourced report.
Saudi Arabia is RIM's biggest Middle East market.
The decision to ban Messenger has left residents in a deeply conservative society with mixed feelings.
A U.S. resident working at the U.S. Consulate in Jeddah said: "I communicate with my family through BlackBerry Messenger and now I will have to go back to using email. I can put up with a lot of restrictions in this country.... But I can't put up with not talking to my family back home."
Rayan, a Saudi in his 30s, said the regulator "should have done their research before allowing BlackBerry in the market."
While many saw the ban as a good move, some Saudis said they did not understand why Research In Motion is refusing to give Saudi authorities the kind of access that they say some Western countries enjoy.
RIM has stipulated that any agreement must apply to the kingdom's three mobile phone operators: state-controlled Saudi Telecom 7010.SE, Mobily 7020.SE and Zain Saudi Arabia 7030.SE.
"RIM will not engage in one-to-one talks with the operators about any solution it will adopt. They will have to take it, all of them," the source said.
The company said Wednesday it has never provided anything unique to the government of one country and cannot accommodate any request for a copy of a customer's encryption key.
Officials at CITC did not respond to requests for comment. (Reporting by Souhail Karam; Writing by Frank McGurty; Editing by Gary Hill)