UPDATE 1-EU to suggest loosening rules on foreign ownership of European airlines - draft

* EU to unveil aviation strategy next month

* Suggests loosening limits of foreign ownership of EUairlines

* Proposes commercial aviation agreements with China, Gulfstates (Adds details, background)

By Julia Fioretti

BRUSSELS, Nov 5 (Reuters) - EU regulators will suggestloosening limits on the foreign ownership and control ofEuropean airlines to encourage investment from non-Europeans andgive a boost to the aviation sector, according to a documentseen by Reuters.

Under current rules, foreign investors cannot own more than49 percent of a European airline, and control of the companymust remain in EU hands, something the EU executive says detersinvestors.

"A relaxation of ownership and control rules should bepursued on the basis of reciprocity through bilateral airservices agreement and at the multilateral level," the draftaviation strategy document says.

The Commission is expected to unveil the strategy next monthas it seeks to boost the competitiveness of Europe's aviationsector, hobbled by the rise of low-cost players such as Ryanair and easyJet, as well as Gulf carriers and therise of Asia as a major air traffic hub.

The document notes the commercial and financial importanceof airlines and their "significant upfront financial needs" tooperate in a competitive environment as reasons to consider therelevance of ownership limits.

The Commission will adopt guidelines on the law on ownershipand control of EU airlines to give more legal certainty toinvestors and airlines.

It will also explore measures to address unfair commercialpractices from third countries, since the current law addressingthese issues is considered ineffective.

Carriers from the Gulf states, such as Emirates,Etihad Airways and Qatar Airways, have come under fire from someEuropean and U.S. airlines who say they benefit from unfairstate aid.

As part of its strategy the Commission will propose thenegotiation of EU-level commercial aviation agreements withChina, Turkey, Saudi Arabia, Bahrain, United Arab Emirates,Kuwait, Qatar, Oman, Mexico, Argentina and The Association ofSoutheast Asian Nations, according to the document.

The executive will also tackle the issue of airlinesemploying lower-cost workers overseas to avoid high labour costsin Europe.

Europe's third-biggest budget airline Norwegian Air has for instance circumvented Norway's labour laws by basingsome of its crew and jets in countries such as Spain andThailand.

EU member states will also be urged to complete the "SingleEuropean Sky" project, in process for a decade and which wouldcut costs and emissions by merging national air corridors. (Editing by Foo Yun Chee and David Holmes)