France tries to defuse dispute over Sunday trading

* French retailers defy Sunday-trading ban

* Unions sue Leroy Merlin, Castorama to close on Sunday

* Former La Poste CEO to propose changes

PARIS, Sept 30 (Reuters) - France's Socialist governmenttried to defuse a growing dispute between retailers and unionsover Sunday-trading laws, acting to clarify rules that businessleaders say are holding back hiring.

Trade unions, defending a century-old ban, are fightingretailers and some willing workers to ensure the laws areenforced after several home improvement chains defied a courtruling on Sunday to lift sales at a time of low economic growth.

Prime Minister Jean-Marc Ayrault tasked the former chiefexecutive of France's postal service to propose ways to fix"weaknesses" in current legislation, which is riddled withinconsistent exceptions.

However, Ayrault said the government would uphold theprinciple of giving workers a day of rest on Sunday enshrined inlaw since 1906, and called on retailers to obey court orders.

Labour Minister Michel Sapin said the government had nointention of changing the law.

"There is one principle to which... French society isattached, and that is the day of rest on Sunday," he toldjournalists before a meeting of concerned ministers.

The decision, delaying a solution by months, highlights theleft-wing government's reluctance to alienate union supportersahead of municipal and European elections next year.

It means that retailers Leroy Merlin and Kingfisher-owned Castorama - which opened on Sunday in the Paris regionin defiance of a court order - face hefty fines unless theycomply with the judge's decision. LVMH-owned cosmeticsstore Sephora was forced to close its Champs Elysees outlet at 9p.m. instead of midnight after unions won a separate ruling.

The head of the Medef employers' association said last weekhe was "disgusted" by the decisions and asked for a repeal of aban he said was preventing the creation of thousands of jobs.

The law allows exceptions for stores in designated "touristzones" and for some types of businesses including restaurants,museums, food and furniture stores and press outlets.

While some workers say they are happy to earn two or threetimes their normal wages on Sundays, unions are set on defendinga ban dating back to the origins of the French labour movement.