Talks on business collaboration between Chilean state aviation company Enaer and European manufacturer EADS are stalled over legal technicalities that may prove to be the undoing of draft contracts known to be under negotiation.

Chile has been aiming to modernize and expand its defense industry and began talks with EADS as part of a plan to boost Enaer's manufacturing potential.

Empresa Nacional de Aeronautica de Chile, the state-controlled national aeronautics enterprise also known as Enaer, was said to be one of the lead negotiators in the deal.

Enaer dates to the 1930s and in 1984 it incorporated the older Maestranza Central de Aviacion, the Chilean air force's aircraft maintenance wing.

Enaer hasn't had much headway in bilateral or collaborative defense contracts but it did manage to assemble the Dakota aircraft through other partners, ran aeronautical clubs and produced the Piper Archer and Warrior aircraft before upgrading to T-35 Pillan military trainer.

The EADS deal promised to give Enaer entry into a higher level of aviation industry development in the country. However, officials and experts say any alliance between Enaer and EADS and Airbus Military combined is unlikely to be workable.

Enaer supplies part of the fuselage for the Airbus Military CN-235 and C-295 transports and part of the empennage for the Embraer ERJ-145 Legacy family.

The reasons for a potential failure of the deal are legal and political rather than diplomatic, analysts said.

Enaer already has an aviation-related manufacturing contract with Brazilian aircraft maker Embraer, which has headquarters in Sao Paulo, Brazil, but numerous connections in Chile and other countries in Latin America.

The Embraer link potentially prevents Enaer from entering into an EADS deal unless Enaer agrees to cease all operations except military maintenance before giving way to a jointly owned new company.

An added problem is that Chilean law requires all aviation operations to be under the direct and sole control of the state of Chile and its armed forces. A joint company would make that impossible.

The major attractions of an EADS partnership have been the promise of a cash injection, transfer of new technology, access to human expertise and the prospect of raising Enaer's international profile.

The proposed partnership was fiercely opposed by Enaer works. Employee representatives said an EADS partnership could cost them jobs, despite guarantees of employment in a newly formed company.

Meanwhile, the future of Enaer is also of interest to Embraer which has invested in the relationship and depends on Enaer for components.

Enaer was forced to suspend production in the aftermath of Chile's 8.8 magnitude earthquake in February 2010. The company said the disruption was temporary and most production resumed soon afterward.