* Two Mistrals were originally destined for Russia
* Discussions at relatively advanced stage, says one source
* Financing may come from Gulf Arab states
* France’s Hollande says several potential buyers out there
By John Irish and Cyril Altmeyer
PARIS, Aug 26 (Reuters) - France is in talks to sell two Mistral helicopter carriers to Egypt after their sale to Russia was cancelled earlier this month, two sources close to the matter said on Wednesday.
Cairo has sought to boost its military power in the face of a two-year-old insurgency based across the Suez Canal in the Sinai peninsula and fears the crisis in neighbouring Libya could spill over. Egypt’s allies are also keen to burnish its image in a region beset by turmoil.
A sale would also fit into France’s recent strategy of favouring predominantly Sunni Arab nations, both politically and commercially, over their Shi’ite rival Iran.
“There are indeed discussions that are relatively advanced to take the two Mistrals,” one French source close to the matter said. “It’s Egypt.”
The source said if there were a deal it would likely be financed in part by money from Gulf Arab states, which consider Egyptian President Abdel Fattah al-Sisi a bulwark against the now-outlawed Muslim Brotherhood movement.
Egypt and Saudi Arabia, which are part of a coalition fighting Houthi rebels in Yemen, agreed at the end of July to work together to create a joint Arab military force, including defining their maritime borders along the Red Sea.
A second French source confirmed the talks, but said the financing was unclear.
France, whose navy already operates three Mistral helicopter carrier warships, has no use for the two ships and will have to pay Russia less than 1 billion euros ($1.14 billion) for cancelling the contract, the French government spokesman said on Wednesday.
The Mistral is known as the Swiss army knife of the French navy for its versatility. It can hold up to 16 helicopters and 1,000 troops.
President Francois Hollande said on Tuesday there were a number of potential buyers for the carriers. Sources told Reuters earlier this month other countries interested included Brazil, Singapore, Malaysia and Canada.
“France has chosen to consider Egypt as a major player in the Middle East,” Hollande said on Tuesday in an annual foreign policy speech. “Its stability is essential, and Egypt expects a lot from France.”
Last year, Egypt bought four small Gowind warships, built by Mistral manufacturer DCNS, which is 64 percent owned by the French state and 35 percent by defence group Thales. It also acquired a Fremm frigate as part of a 5.2 billion euro contract for 24 Rafale warplanes earlier this year.
DCNS and the French defence ministry declined to comment on Wednesday. ($1 = 0.8754 euros) (Additional reporting by Marine Pennetier and Elizabeth Pineau,; editing by Larry King)