* Rheinmetall to sign contract in coming weeks - paper

* To make Fuchs military vehicles in Algeria - paper

* Contract is part of 10 bln euro deal approved in 2011

* Rheinmetall shares pare gains

(Adds details on defence project, company comments)

FRANKFURT, June 18 (Reuters) - German defence group Rheinmetall RHMG.DE is set to sign a 2.7 billion euro ($3.7 billion) contract in the coming weeks to start production of Fuchs military vehicles for Algeria, newspaper Handelsblatt reported on Wednesday, citing no sources.

The deal is part of a bundle of arms contracts worth 10 billion euros that was approved by the German government in 2011.

At the time, industry sources told Reuters that Rheinmetall's joint venture RMMV was to build Fuchs vehicles, while car and truck maker Daimler DAIGn.DE would sell trucks and off-road vehicles and industrial group ThyssenKrupp

TKAG.DE would build frigates for Algeria.

According to Handelsblatt, there has been concern in recent years about the risk of terrorist attacks and kidnappings in Algeria, but now the groundwork has been laid for the new factory where more than 900 Fuchs vehicles are to be built.

Rheinmetall, ThyssenKrupp and Germany's Economy Ministry declined to comment on the report. Daimler said production of truck and bus parts in Algeria started this year.

Shares in Rheinmetall earlier rose as much as 3.6 percent to the top of Germany's mid-cap index .MDAXI but had pared gains to trade 1.7 percent higher by 0954 GMT.

($1 = 0.7345 Euros)

(Reporting by Harro ten Wolde and Maria Sheahan; Additional reporting by Tom Kaeckenhoff, Anneli Palmen, Ilona Wissenbach and Berlin bureau; Editing by Jason Neely and Mark Potter)

((harro.tenwolde@thomsonreuters.com)(+49 69 7565 1271)(Reuters Messaging: harro.tenwolde.thomsonreuters.com@reuters.net))

Keywords: RHEINMETALL ALGERIA/