BNP suspends Fortis deal after legal challenge

* BNP Paribas says its part of Fortis deal cannot proceed

* Belgium remains committed to Fortis carve-up plan

* BNP says it too is still keen on Fortis

* BNP Paribas shares drop 7 pct

* Analysts predict BNP rights issue

(Updates with latest BNP Paribas comment)

By Antonia van de Velde and Sudip Kar-Gupta

BRUSSELS/PARIS (Reuters) - The rescue of stricken bank Fortis ran into more trouble on Thursday when French bank BNP Paribas (BNPP.PA) said it was suspending a key part of the deal due to a legal challenge over the transaction.

The news came after BNP, France's biggest bank, revealed 710 million euros ($1 billion) of losses at its investment banking unit earlier this week and said it may cut 700 jobs.

The deal was designed to rescue Fortis (FOR.BR)(FOR.AS), severely weakened by the financial crisis, but was also meant to strengthen BNP.

Fortis' large base of retail customer savings would make BNP Paribas the euro zone's biggest bank in terms of deposits and strengthen its capital position -- crucial for banks facing large losses from the credit crunch.

BNP shares fell 7.6 percent to 31.6 euros as analysts predicted it might instead have to tap shareholders for fresh capital if the Fortis deal collapsed. Fortis shares were up 10.4 percent to 1.06 euros at 1306 GMT on hopes that the deal may be renegotiated at a higher price.

Brussels said it still wanted to go ahead with the rescue of the Belgian arm of Belgian-Dutch Fortis and will challenge the ruling while BNP said it stood by a statement last week that it remained interested in the Fortis operations and said it is also examining its legal options.

However, analysts said the future of Fortis remained clouded in uncertainty with the possibility of a lengthy legal battle.

"We don't know whether it will take place or when it will take place, and that's bad," said an analyst, who declined to be named.

LEGAL CHALLENGE

The plan was thrown into doubt last week by a court ruling which found that the Belgian government had not fully considered the interest of Fortis shareholders in the deal to sell the company. The immediate consequence of the ruling was to suspend the transaction for 65 days.

"Given the ruling by the Brussels Court of Appeal on Dec. 12, the acquisition of a stake by BNP Paribas in Fortis Banque cannot proceed as initially planned," BNP said in a statement.

In October, BNP agreed to buy Fortis assets for 14.5 billion euros. As part of the deal, the Belgian government was to take a stake of 11.7 percent in BNP, and BNP was to take 75 percent of Belgian/Dutch group Fortis' Belgian arm, Fortis Banque.

Belgian Prime Minister Yves Leterme is under mounting pressure over his handling of the matter, with governing parties agreeing on Wednesday to launch an investigation into the government's response to the financial crisis.

"We want to continue studying the project," Belgian Finance Minister Didier Reynders told reporters.

"We will respond to questions in parliament, it is important to protect Fortis clients," he added.

Oddo Securities analysts said the whole operation risked being scrapped.

"The chances of the deal being cancelled appear increasingly high," Oddo said in a research note. "Unfortunately, this scenario is coupled with a higher probability of a capital increase (at BNP)."

BNP added that the shareholders' meeting on the Fortis deal it had scheduled for Dec. 19 would no longer take place.

($1=.6955 Euro)

(Additional reporting by Dominique Vidalon, Helen Massy-Beresford and Mark John; Editing by Andrew Callus and Elaine Hardcastle)