* Talks hampered by pricing of technology transfer
* Rafale talks "progressing well" - India PM
* France unsure about technical capacity of Indian aerospace company
* Officials say deal could be finalised by July
By Manoj Kumar and Elizabeth Pineau
NEW DELHI, Feb 14 (Reuters) - India and France are speeding up negotiations on a $10 billion deal for 126 Rafale aircraft following disagreements over the cost of building them in India, which caused months of delays, two Indian Defence Ministry officials told Reuters.
India started exclusive talks with French Dassault Aviation's Rafale for a 126-plane order in January 2012, over the competing Eurofighter Typhoon . The two sides still have to sign a final contract.
French President Francois Hollande discussed the deal with Indian Prime Minister Manmohan Singh on Thursday, the first day of a two-day visit to India.
"We've seen progress in these discussions and I'm hopeful that they will succeed," Hollande said after the talks. Singh said discussions on the sale were "progressing well".
The deal is being negotiated against the backdrop of the arrest of the chief executive of Italy's Finmeccanica this week after allegations kickbacks were paid during the sale of helicopters to India. India has suspended the deal pending investigation.
There were no immediate indications the fallout from the Finmeccanica investigation would affect the French deal.
Indian Defence Minister A.K. Antony said on Wednesday that the kickback allegations were likely to cause an "initial setback" to India's push to modernise its weaponry.
DEAL FINALISED IN JULY?
The talks on the Rafale sale have progressed slowly because of differences about how to price the transfer of technology, sourcing of spares and the selection of an Indian partner, two Indian Defence Ministry officials said.
"There are three issues of contention - pricing of transfer of technology, sourcing from India and the joint venture with Hindustan Aeronautics Ltd (HAL)," said one of the ministry officials, who said negotiations had been delayed by a few months, largely because of those issues.
The other official said the contentious points had been mostly resolved and the deal could be finalised as soon as July.
Dassault declined to comment.
The second official said Dassault had earlier asked India to pay up to $2 billion more for the future upgrading of technology that would be transferred over the 30-year life-cycle of the deal.
At an air show in Bangalore last week, India pledged not to let defence cuts stand in the way of efforts to finalise the deal.
Following India's strong objections to the cost escalation, France has broadly agreed to review its decision but negotiations were still going on for calculating the price for the maintenance and life-cycle cost of the planes, the second official said.
COMMITTED TO A DEAL
Under the Rafale deal, Dassault is expected to send 18 ready-made jets, then manufacture the rest in India.
India expects the deal will provide business of $4 billion to $5 billion to Indian companies, said the second ministry official, who has knowledge of the talks.
Both officials said another contentious issue in the negotiations was the selection of India's state-run Hindustan Aeronautics Ltd (HAL) as partner of Dassault to manufacture planes in India.
Rafale has expressed doubts about the technological capability of HAL to manufacture such a sophisticated fighter jet, the official said. A HAL programme to manufacture advanced jet trainers is running years behind schedule.
However, India has told French negotiators that provisions of entering into a joint venture with the HAL to produce fighter jets was non-negotiable and there was no question of involving any private company in the deal, the officials said.
The second official said both countries were committed to the deal, and India's defence minister, A.K. Antony, and the Indian air force chief, N.A.K Browne, were making it a top priority during the upcoming fiscal year that begins in April.
President Hollande, accompanied by ministers and corporate delegates, also discussed the sale of nuclear plants to India.
That included the Jaitapur nuclear plant being built by France's Areva, which is still under negotiations and has been hit by protests in the Indian state of Maharashtra.