* BA parent could order around 20 Airbus A350-1000s - sources
* Move highlights urgency of Boeing 777 revamp, analyst says
* Airbus to break ground on new U.S. plant for A320 jets
By Tim Hepher
PARIS, April 7 A potential $7 billion order from British Airways for Airbus A350 jets is set to hand Boeing Co its next major challenge as it nears the end of a three-month crisis over the grounding of the 787 Dreamliner, analysts said.
If confirmed, the order would strike a blow inside one of Boeing's most loyal wide-body customers and may hike pressure on the U.S. planemaker to defend future profits by formally offering a revamped version of its successful 777 mini-jumbo.
Industry sources said on Sunday that International Airlines Group, which owns both BA and Spain's Iberia, appeared close to ordering approximately 20 Airbus A350-1000 aircraft worth $332 million apiece at list prices.
However, the negotiations - first reported by The Wall Street Journal - are expected to continue until the last minute for what is one of the most closely-watched wide-body aircraft orders of the year.
Airbus and IAG officials both declined to comment.
"This has been a big fight," said an industry source, adding that a wider overhaul of BA's fleet could include orders at a later stage for the revamped Boeing jet known for now as "777X."
The face-off between the "big twins" is the next big battle in the $100 billion a year commercial jet industry. The world's dominant planemakers are looking at thousands of orders for large twin-engined jets as older models approach retirement.
Some industry commentators have accused Boeing of leaving the door open to Airbus's latest designs by appearing to drag out the launch of its proposed "777X," especially while distracted by the Dreamliner's grounding over safety concerns.
"If Boeing had any doubts about the need to move aggressively on 777X, this should remove those doubts," said Richard Aboulafia, an analyst with the Virginia-based Teal Group.
"It is a strong reminder that there is a replacement cycle coming up at key customers," he said.
Boeing insists there is no let-up in the design of the 777X, which is expected to include folding wingtips to allow for an increased wingspan while fitting at existing parking stands.
"We continue to study an airplane that would enter service near the end of the decade," said Boeing spokeswoman Karen Crabtree. "We are moving forward aggressively with customers; they are happy with the airplane design and we are happy with the progress that has been made."
Boeing also continues to see IAG as an important customer and looks forward to working on meeting its fleet needs, she added.
The carbon-composite Airbus A350 is being developed in three sizes at an estimated cost of $15 billion.
Due to enter service in 2017, the A350-1000 will carry 350 passengers and compete with the 777, which is being expanded to hold just over 400 people. Two smaller versions, the first of which is due to make its maiden flight this summer, target the same market as Boeing's revolutionary lightweight 787.
After false starts, Airbus hopes to break into a slice of the market that has generated significant cash for Boeing since the 1990s, when improved two-engine technology won the day over a four-engine Airbus alternative, the A340.
After beefing up the A350-1000's original engines, Airbus has persuaded some existing A350 customers to expand their orders or upgrade from smaller models. But winning a new order from a long-term Boeing buyer such as BA would be a major victory.
In a further challenge to Boeing, Airbus is preparing to start construction of a $600 million assembly line for short-haul A320 jets in Mobile, Alabama, on Monday. That will make it a civilian manufacturer on U.S. soil for the first time.
The head of Dubai's flagship carrier Emirates, the world's largest existing operator of 777s, said last month he expected Boeing to start officially selling the 777X within weeks.
Airlines will face a choice of an all-new A350-1000 model which Airbus says will slash costs significantly; or an older, but larger and modernized 777, which Boeing says will be highly efficient per seat while maintaining common features.
The contest has also polarized rivalries between engine manufacturers, with the 777 due to remain powered by General Electric and Rolls-Royce driving the A350-1000.
BA needs to replace its 52 Boeing 747s, the world's largest jumbo fleet. It already has 12 Airbus A380 superjumbos on order, the first of which emerged from a paint shop last week.
In what appeared to be a premature announcement triggered by a media leak, IAG last week announced plans to exercise options for 18 Dreamliners on top of 24 already ordered and said it could add more for Iberia depending on its restructuring.
Although long in the works, the news added a note of confidence as Boeing completed tests of a battery system designed to allow regulators to clear the 787 to return to service. Analysts say the order could include another new variant in Boeing's product pipeline, the 320-seat 787-10X.