* Paris to deliver first Mistral helicopter carrier end of year
* Sources say cancelling 1.2 bln euro deal would hurt France more
* Washington, some EU partners want Paris to review contract (Adds officials, details)
By John Irish and Elizabeth Pineau
PARIS/BAKU, May 12 France will press ahead with a 1.2 billion-euro ($1.66 billion) contract to sell Mistral helicopter carriers to Russia because cancelling the deal would do more damage to Paris than to Moscow, French diplomatic sources said on Monday.
France's move illustrates the limitations of European Union sanctions meant to punish Russia for its annexation of Crimea and dissuade Moscow from intervening in east Ukraine.
The United States has been pressing France, Germany and Britain to take a tougher line against Russia. For France, this would mean at least delaying the Mistral contract. For Britain, closing its mansions and bank vaults to magnates close to Russian President Vladimir Putin. For Germany, initiating gradual steps to reduce dependency on Russian gas.
France had said it would review the deal in October - but not before. However, French diplomatic sources said on Monday the 2011 contract with Russia for two Mistral helicopter carriers, with an option for two more, would not be part of a third round of sanctions against Moscow.
"The Mistrals are not part of the third level of sanctions. They will be delivered. The contract has been paid and there would be financial penalties for not delivering it.
"It would be France that is penalised. It's too easy to say France has to give up on the sale of the ships. We have done our part."
The Russian defence ministry warned Paris in March it would have to repay the cost of the contract and additional penalties if it cancelled the deal.
European ministers meeting in Brussels on Monday discussed what would trigger more hard-hitting economic sanctions on the Russian economy with big EU powers Germany, France and Britain all threatening tougher action against Moscow if it undermined the May 25 Ukrainian presidential election.
U.S. Assistant Secretary of State Victoria Nuland said on May 8 that she had qualms about the French deal after several U.S. lawmakers demanded Washington put pressure on France to send a strong message to Russia.
Russia agreed to buy the Mistrals, giving it access to advanced technology. This alarmed some of France's NATO allies at the time, especially in the aftermath of Russia's 2008 war with Georgia.
"We have regularly and consistently expressed our concerns about this sale, even before we had the latest Russian actions, and we will continue to do so," Nuland told the House Foreign Affairs Committee, setting up a potentially uncomfortable meeting between U.S. Secretary of State John Kerry and French Foreign Minister Laurent Fabius in Washington on Tuesday.
U.S. President Barack Obama is expected to raise the issue with President Francois Hollande when he attends the D-Day commemorations in Normandy next month.
Lithuanian Foreign Minister Linas Linkevicius said last week he believed the European Union should include an arms embargo in any new round of sanctions on Russia.
Officials have suggested Paris could look to sell the ships to a different buyer or without the technology. One official also said there were provisions under World Trade Organisation rules that enable countries to break contracts under such circumstances.
The long-discussed French sale was Moscow's first major foreign arms purchase in the two decades since the fall of the Soviet Union. Former President Nicolas Sarkozy had hailed the signing of the Mistral contract as evidence the Cold War was over. It has created about 1,000 jobs in France.
A French government source said at no point had the U.S. officially expressed any concern over the sale, adding that the carriers would not be delivered with any weaponry.
"We are not delivering armed warships, but only the frame of the ship," the source said.
The first carrier, the Vladivostok, is due to be delivered by the last quarter of 2014. The second, named Sebastopol after the Crimean seaport, is supposed to be delivered by 2016.
About 400 Russian sailors are due to come to France in June to receive training for the Mistral. The carriers can hold up to 16 helicopters, such as Russia's Ka-50/52s. (Additional reporting by Marine Pennetier and Luke Baker in Brussels; Editing by Larry King, Janet McBride)