* Reform aims to make huge farm subsidies fairer, greener
* Largest farms set to be biggest losers
* Farm budget agreed but many details still to resolve
By Charlie Dunmore and Nigel Hunt
LUXEMBOURG, June 24 (Reuters) - European Union negotiators gathered on Monday for talks to finalise reforms of the bloc's 50 billion euro-a-year farm policy that could remove almost half of the subsidies now given to some of its largest grain and livestock producers.
Many of the proposals are meant to make the 50-year-old common agricultural policy (CAP) more fair and environmentally friendly, to justify the huge sums paid to farmers each year.
But critics say EU politicians plan to reverse some of the progress made in previous CAP reforms and the proposals could harm Europe's food security.
Representatives from EU governments, the European Parliament and the European Commission will hold two days of talks in Luxembourg to agree the likely shape of the reform, before reconvening in Brussels on Wednesday to seek a final deal.
Some of the toughest issues in the reform were agreed by EU leaders in February, including the overall size of the farm budget and the share each country will receive.
Agriculture will consume nearly 40 percent of the bloc's 960 billion euro ($1.3 trillion) budget for 2014-2020 - the period covered by the reform - ensuring it remains the biggest single item of EU expenditure.
Europe's biggest agricultural producer, France, will continue to scoop the largest share of CAP funds at around 8 billion euros a year, followed by Spain and Germany each with about 6 billion annually.
But there are many areas where governments and the other EU institutions have yet to reach an accord.
Some governments want to water down moves to harmonise subsidy payments based on the current size of holdings, rather than on historical production levels as at present.
The present system disproportionately benefits those who in the years 2000-2002 had the largest output, for example industrial-scale grain producers in France's Paris basin.
The change could see the subsidies paid to some of Europe's biggest grain and livestock farmers cut by up to 40 percent, EU officials said.
"This is a major issue for some governments. You're talking about taking money away from some farmers and giving it to others, which politically is very sensitive," said one EU official involved in the talks.
As a result, France is leading a push to let governments continue linking up to 13 percent of total subsidies to output, which some opponents say goes against the spirit of recent reforms.
Governments oppose a mandatory cap on annual payments to individual farms of 300,000 euros, which would also see the biggest and most efficient producers lose out. The limit is backed by the European Parliament and the Commission.
There is disagreement over the deadline for abolishing EU sugar production quotas, blamed for pushing up domestic prices and limiting European sugar exports due to global trade rules.
The Commission proposed an end to quotas in 2015, while governments would prefer 2017 and the parliament 2020. EU officials involved in the talks say a compromise of 2017 or 2018 is the most likely outcome, depending on the precise conditions.
All three institutions have agreed that 30 percent of future direct subsidies should be conditional on farmers taking steps to improve their environmental performance. But they disagree on the precise measures and sanctions for non-compliance.
Governments and MEPs want to weaken the Commission's proposal that farmers should leave 7 percent of their land fallow. Farm groups have warned that the move could hit Europe's food production.
Farmers that don't comply should only lose the 30 percent of payments linked to the new measures, the parliament has said. But governments and the Commission say that would effectively make the rules optional, and have argued for tougher sanctions.
If the negotiators strike a deal on Wednesday as expected, it must be rubber-stamped by the full parliament and EU governments before entering force on Jan. 1 next year. ($1 = 0.7612 euros) (Editing by Anthony Barker)