But banks, whose latitude for making such investments have been reduced by looming capital rules, are resisting the government's entreaties, the sources said.

"On top of these objective considerations, it is also true that no financial institution is eager to please the government after the tax burden they imposed," a senior financial institutions banker said.

French lenders and the Socialist government of President Francois Hollande have been at odds over several issues, including taxation and regulation, although the banks succeeded in softening a threatened crackdown.

The government is keen on stopping the exchange, now part of NYSE Euronext, from falling into foreign hands, a concern some banks share as it could leave them in a weaker position to win mandates for the listing of major French companies.

IntercontinentalExchange (>> IntercontinentalExchange Inc) agreed to buy transatlantic market operator NYSE Euronext (>> NYSE Euronext) for $8.2 billion (5.3 billion pounds) in December. It has committed to float its European activities, Euronext, in order to secure regulatory approval.

ICE is keen to list as much as 50 percent of Euronext, an unusually large stake for an initial public offering, as it needs to refinance NYSE's acquisition, said one of the people involved in the talks, who asked not to be named.

Euronext includes the Paris, Amsterdam, Brussels and Lisbon stock exchanges and the French government is also seeking to bring banks from those countries to the negotiating table.

While the acquisition of a 34 percent stake looks challenging, there could be a rationale for French and European banks to hold a smaller stake - around 10 to 15 percent - and have a say in the exchange's future strategy, a second source close to the deal said.

"If Euronext ends up under non-European command, that would be bad news for European banks," said a source involved in the talks.

"If all of a sudden, all CAC 40 companies are listed in Singapore or somewhere else outside Europe, French banks won't be the best placed to conduct IPO and capital raising. That would significantly dent their investment banking business."

POTENTIAL OWNERS

Sources have told Reuters the exchange would also consider selling Euronext as an alternative to a stock offering.

Potential European owners for Euronext include Deutsche Boerse (>> Deutsche Boerse AG) and the London Stock Exchange Group (>> London Stock Exchange Group Plc), the senior banker said.

While bankers view a merger with Deutsche Boerse as the best strategic option to create a truly European player, that option doesn't seem to be high on the French government's agenda.

"You can see it as a resurgence of French nationalism," one of the sources said.

Private equity buyers who have invested in exchanges in the past could also be interested in taking a minority stake in Euronext, either alone or within a consortium.

These funds would include Silver Lake, a former stakeholder in what is now Nasdaq OMX Group (>> NASDAQ OMX Group, Inc.), and TA Associates, which used to own electronic credit derivatives trading service Crediex. Sources say another candidate is AnaCap, which has set up a joint venture with Blackstone (>> The Blackstone Group L.P.) to hunt for deals in Europe's banking sector.

Two of the people said Paris could, as a last resort, itself take a minority stake in Euronext through its state bank Caisse de Depots or sovereign wealth fund FSI. The government helps regulate Euronext so could set limits on its future ownership.

BNP Paribas (>> BNP PARIBAS) and Credit Agricole (>> CREDIT AGRICOLE) declined to comment, while Societe Generale (>> SOCIETE GENERALE) did not return a call seeking comment. The French Treasury was also unavailable.

Euronext's IPO is more likely to take place in 2014 since ICE needs to first close NYSE's acquisition and market conditions need to improve, one source said.

NYSE bought Euronext for 8 billion euros in 2007.

(Additional reporting by Dominique Vidalon; Editing by Rosalind Russell)

By Sophie Sassard and Christian Plumb