(Adds Stolpe comments, more analysis, background)
By Philip Blenkinsop
BERLIN, Feb 17 (Reuters) - Germany scrapped a contract for a pioneering road toll system on Tuesday after months of wrangling with developers and said the project's collapse would cost the cash-strapped country 6.5 billion euros ($8.3 billion).
Transport Minister Manfred Stolpe announced the decision, a painful one for government and industry, after talks through the night with Toll Collect, a consortium of Deutsche Telekom , DaimlerChrysler and France's Cofiroute .
Toll Collect's system, using satellites to track truck movements, was to involve state-of-the-art technology with rich export potential, but has been plagued with technical problems.
The companies failed to launch the highway truck toll on August 31 and also missed a November introduction date.
The government found an offer to start a simpler toll system by the year-end and a full version 12 months later unacceptable.
"I find it very tragic. Ever since this mess started last summer I've been trying to avoid blaming the companies... It's image-damaging and is a setback for innovation," Stolpe said at a news conference.
The minister left the door slightly open, saying the government might be willing to agree a new deal in the next two months as long as Toll Collect's offer met government demands.
One of the chief stumbling blocks in recent talks has been the consortium's desire to limit its liability in the event of further delays. Stolpe said Toll Collect's unwillingness to move sufficiently implied it did not have faith in its technology.
The stock market reaction was mixed. DaimlerChrysler shares were almost flat at 36.08 euros, while those in Telekom rose 4.0 percent to 16.51 euros in a slightly higher German market.
Pia Hellbach, a fund manager at Union Investment in Frankfurtsaid the companies' shares could be hit by the threat of a fine for failing to comply with their contracts.
"This has been a long and drawn-out issue and from the start it presented many problems. For this reason, market expectations have not been high," she said.
INFRASTRUCTURE PROJECTS THREATENED
Without the toll income, Germany's immediate problem is how to finance a host of infrastructure projects, many of which it hoped to complete by 2006 when it hosts the soccer World Cup, while meeting European Union demands to rein in its budget.
"It makes the whole outlook for public investment and the railway privatisation more uncertain," said Lothar Hessler, an economist at HSBC Trinkaus in Duesseldorf. "How could the government draw up a contract so unfavourable to itself?"
Stolpe said Germany would reintroduce the eurovignette, a levy it is entitled to charge heavy vehicles under European Union rules and which it had cancelled at the end of August, when the truck toll's launch was originally planned.
However, the revenue is likely to be only a fraction of the 2.1 billion euros per year the toll system was to have provided the state and will take at least six months to arrive.
"The way it's gone makes it a really bad example of public-private partnership," said Stolpe.
In the meantime, the government will ask arbitrators to determine the size of damages from the Toll Collect consortium.
"The lawyers will be looking forward to this," Stolpe said.
The government will also prepare another tender for firms willing to offer Germany a road toll, although this was likely to be at least two years away.
Italian, Swiss and Austrian companies have previously expressed an interest. (Additional reporting by Jess Smee in Frankfurt and David Crossland in Berlin)