By John Irish and Gregory Blachier
PARIS (Reuters) - France's new government faced a first test of unity on Thursday as a power struggle broke out between Foreign Minister Laurent Fabius and new Economy Minister Arnaud Montebourg over control of trade policy.
This week's announcement of a smaller 16-minister team under new Prime Minister Manuel Valls, France's tough-talking former interior minister, was billed as a break with the chaotic past 22 months of President Francois Hollande's first government.
Diplomatic and government sources told Reuters on Wednesday that Hollande had promised to give Fabius an expanded foreign ministry portfolio tasked with cutting the trade deficit and developing external business as part of wider role to boost growth opportunities overseas.
But when asked whether the Trade Ministry would move to a larger Foreign Affairs and International Development Ministry, a visibly irritated Arnaud Montebourg said this was not decided.
"It's up to the prime minister, all that. It's not been decided. It's still being done," he told reporters after a ceremony marking his taking charge of economy ministry.
Trade has been under the remit of the economy ministry since 1958. But since becoming foreign minister in 2012 Fabius has tried to shift more diplomatic focus towards winning contracts in markets where French firms are traditionally weak.
Fabius, 67, is the most experienced minister in Hollande's new Socialist government, having become the youngest post-war French prime minister at the age of 37 in 1984.
While he has had rivalries with Hollande - whom he used to refer to as "wild strawberry" for what he considered Hollande's habit of hiding his intentions - Fabius has stayed clear of gaffes and quarrels that engulfed the previous government.
However the stand-off with the opinionated Montebourg, known for attacks on big business and the European Commission, does not bode well for the cohesion of the government.
"What stupidity. You would think they would be able to sort this out between themselves first before it gets public," said a French official who declined to be identified.
"We can see that the economy is now putting up a fight, and while yesterday, we were sure trade would be under the foreign ministry; now it's not so clear cut."
A source within the prime minister's office said late on Thursday he had decided to give trade to the foreign ministry, although it would not be made official until Tuesday when the junior cabinet posts are announced.
Two government sources had said on Wednesday that Fleur Pellerin, considered to have done well in her role as junior minister in the economy ministry, would report to Fabius as trade, tourism and EU affairs minister. She declined comment.
France's trade deficit, which hit a record of 74 billion euros ($102 billion) in 2011, has fallen to about 61 billion euros but remains one of the starkest signs of French firms' loss of competitiveness on international markets.
Among the stakes would also be who defends French interests in negotiations with Washington over a free-trade agreement between the United States and the European Union.
(Additional reporting by Yann Le Guernigou and Julien Ponthus; editing by Mark John/Mark Heinrich)