BRUSSELS, Belgium (Reuters):

Negotiations between the European Union (EU) and a group of companies that will operate a new EU satellite navigation system have stumbled over who will pay for potential liability claims, a source said on Friday.

The source, who is close to the negotiations, told Reuters the two sides were committed to reaching a deal but had not yet agreed on how potential lawsuits by users of the navigation technology would be handled.

"We're having a stumbling block on (the) liability issue - on third-party liability," the source said.

A consortium of French, German, Spanish, British and Italian industrial heavyweights is negotiating to build and deploy the satellite system, known as Galileo, which would rival the US Global Positioning System.

Fear

The source said the companies feared they could be sued if the technology malfunctioned for some users, leaving them open to claims not sufficiently covered by insurance.

"Somebody has to take care of all those claims," the source said. "Private companies are certainly not taking on unlimited liability."

The stumbling block may delay an agreement on the "concession" contract to run the system, which both sides had hoped to have sealed by the end of this year.

EU Transport Commissioner, Jacques Barrot, said on Friday the talks had not stalled. The project is moving forward even if the contract is signed later than planned, he told reporters.

"I don't think that the negotiations are blocked," Barrot said after presenting a paper on different ways the Galileo project can be used.

Galileo will eventually have 30 satellites orbiting the earth to be employed for mostly civilian uses ranging from driver assistance to search and rescue help.

Military purposes

Barrot reiterated he thought the project could be used for military purposes - a move some EU states do not support.

"Let's leave that door open," Barrot said.

Despite a potential delay in the contract agreement, the bulk of the project remains on schedule, he said. One satellite is in orbit and another will follow in 2007.

The system will be organised as a public-private partnership, with the Commission wanting two-thirds of the funding to come from industry and the rest from public coffers.

The consortium is made up of European aerospace giant EADS, France's Thales and Alcatel, Britain's Inmarsat, Italy's Finmeccanica, Spain's AENA and Hispasat, and an eighth member that includes Deutsche Telekom and the German Aerospace Centre.