* CEO to step back from defence unit after turnaround
* Open to asset swap or other deals with Thales
* Studying upgrade of Rafale engine to boost UAE prospects
* Smart card margins in line with group (Adds quotes, shares)
By Tim Hepher and Mathias Blamont
PARIS, June 8 (Reuters) - The head of French conglomerate Safran said on Monday he was ready to step down as head of its defence and security division after bringing it back to profit, and rekindled interest in co-operation with Thales.
Analysts have been anxious for signs that the former Sagem unit is ready to stand on its feet and expand after internal management disputes and losses that caused group Chief Executive Jean-Paul Herteman to take charge and weighed on Safran shares.
"We cannot rule out that the development of the defence and security division will mean that one person takes on a special role for its expansion. And this may well happen in 2009," CEO Herteman told Reuters in an interview.
Like most defence firms, Safran has been aiming to win more market share in the fast-growing security market in recent months, and the French group bought GE Homeland Protection for $580 million in April..
Herteman added that Safran could examine swapping assets with French defence electronics group Thales.
The subject has been mooted before but it is the first time either side has commented on the possibility since Dassault Aviation became the core industrial shareholder of Thales and appointed a new chief executive last month.
Safran is 30 percent owned by the French state, which also has a 27 percent stake in Thales.
"We could strengthen our co-operation (with Thales) in certain areas, set up joint ventures or swap assets," said Herteman, who added that the businesses which could be impacted in this way were worth "several hundreds of millions of euros."
Safran shares rose 2 percent to 9.315 euros.
Despite the French state's key shareholdings in both Safran and Thales, Herteman said it was not up to the government to tell Safran what to do over Thales.
"The state cannot impose its choice on us, but it can encourage or aid us. Safran will make its decision based on the interests of its key stakeholders and staff, and it's up to us to explain what these interests are."
Herteman said Safran is studying a boost in thrust for the M88 engine that powers the Rafale fighter plane built by Dassault Aviation. France is trying to break a drought in export orders for the combat jet by landing an order with the United Arab Emirates, which has asked for an engine revamp.
Herteman declined to give the cost of the increase from 7.5 tonnes to 9 tonnes but agreed it would be "significant".
Herteman said Safran's smart card business should produce a an operating margin in 2009 close to the 5-6 percent targeted for the group, which was formed in 2004 from a merger between state engine maker Snecma and electronics firm Sagem.
(Reporting by Matthias Blamont, Tim Hepher, Sudip Kar-Gupta; Editing by Erica Billingham)