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* US ex-diplomat alleges $17m paid to free four Frenchmen
* Hollande refuses to pay ransom to hostage-takers
* Sarkozy's ex-chief of staff denies ransom paid
* State Department says concerned about extremists' hostage taking (Adds U.S. State Department)
By Alexandria Sage and Sophie Louet
PARIS, Feb 8 (Reuters) - France brushed off an allegation by a former U.S. diplomat that it paid a $17 million ransom, in vain, for the release of four hostages abducted in 2010 from Niger, a charge that contradicts the government's stated no-negotiation policy.
The U.S. ambassador to Mali from 2002 to 2005, Vicki Huddleston, told iTele in an interview broadcast on Friday that the ransom paid by France took a circuitous route before landing in the hands of al Qaeda's north African unit AQIM.
"Of course, France didn't walk over to the Salafists [of AQIM] and say, 'Here's your 17 million,'" Huddleston said in the interview conducted on Thursday in Albuquerque, New Mexico.
"The ransoms, like all other ransoms paid, were paid indirectly and ended up in the hands of the Malian government and then they were turned over, at least part of it, to the Salafists."
The four French men were captured by AQIM (Al Qaeda in the Islamic Maghreb) from a mining town in the north of Niger on Sept. 16, 2010, and are now believed to be in northern Mali.
AQIM threatened to kill the hostages last year if France intervened militarily in Mali and has demanded a 90 million euro ($120.5 million) ransom for their release. It holds two other French hostages.
As many as eight French hostages currently are held by Islamist militants in Africa's Sahel region.
The issue is sensitive in France, where President Francois Hollande in part justified military action in Mali in order to prevent the north from being used as a launch pad for terror attacks in Africa and in the West.
Hollande declined to comment on the specific allegation - which would have occurred under his predecessor Nicolas Sarkozy - but reiterated that France does not pay to free its hostages.
"Today ... we are looking for contacts but the question of financing cannot be raised," he said during a news conference after an EU summit in Brussels.
ONLY GOAL IS FREE HOSTAGES
In Paris, Foreign Ministry spokesman Philippe Lalliot said Huddleston's assertion was based on rumours and Prime Minister Jean-Marc Ayrault also refused to confirm or deny it.
"Concerning our nationals currently held as hostages in the Sahel, we need a lot of sang-froid and a sense of responsibility because the government along with the president has only one objective, that's to obtain their freedom," he said.
In Washington, State Department spokeswoman Victoria Nuland said Huddleston's statement "reflects a concern that we share, that AQIM and other groups like this do use hostage-taking as their main means of financial support."
"We continue to encourage all of our partners and allies in the international community to absolutely refuse to cooperate with hostage-taking and to have a zero-tolerance policy for this kind of effort. Because, otherwise, we're just feeding into the coffers of the terrorists," she said.
Nuland declined to comment about the specific hostage case Huddleston recounted in the interview or the amount of ransom the former envoy said was paid to hostage takers.
The now-retired Huddleston said European governments paid about $89 million between 2004-2011 to secure hostages' freedom.
"Although governments deny that they're paying ransom, everyone is pretty much aware that money has passed hands, indirectly through different accounts and it ends up in the treasury, let us say, of Al Qaeda in the Islamic Maghreb and allows them to buy weapons and recruit," said Huddleston.
From June 2009 to December 2011, Huddleston was the U.S. Deputy Assistant Secretary of Defence for African Affairs.
Sarkozy's chief of staff during the time of the hostage-taking, Claude Gueant, insisted ransoms had never been paid.
"I maintain that France, the French state, has never paid for the freedom of hostages," Gueant told iTele. "France never paid a ransom."
A rescue operation ordered by Hollande last month to free a French hostage held in Somalia since mid 2009 ended in failure.
Al-Qaeda-allied Somali militant group al Shabaab later said they had killed the hostage, Denis Allex. ($1 = 0.7469 euros) ()