* Algerian paper reports ransom demand for Briton and Swiss

* No confirmation whether negotiations under way

(Adds background on negotiations)

ALGIERS, May 16 (Reuters) - Al Qaeda has demanded 10 million euros ($13.54 million) in exchange for a Briton and a Swiss national it captured in the Sahara, backing away from a threat to kill one of the hostages, an Algerian newspaper reported.

The group's north African wing had said it would kill the Briton by May 15 if the British government did not release Abu Qatada, a Jordanian Islamist it is holding in prison.

Al Qaeda's chief in the desert region, Hamid Essoufi, also known as Abdelhamid Abu Zeid, was behind the ransom demand and was willing to accept 8 million euros as a minimum, daily paper El Khabar cited an unnamed security source as saying.

In return, Al Qaeda would first release the Swiss hostage as a sign of goodwill and would free the Briton weeks later, it said.

Britain has asked the group to show that the hostages are alive and well, the paper reported. It said Britain had sent a Burkina Faso national from Europe to act as an intermediary and obtain guarantees that the two were still alive.

Al Qaeda in the Islamic Maghreb (AQIM) has claimed responsibility for the kidnapping of two Canadian diplomats and four European tourists in the past five months. The two diplomats and two of the tourists were freed in Mali in April.

Negotiations to free the remaining hostages began using mediators from local tribes and Islamists based in Europe, according to El Khabar.

It said joint operations by states in the region to flush out the militants were suspended at the request of an unnamed European country to avoid jeopardising the talks.

There was no official confirmation that negotiations were under way, and Britain has not released the name of the British hostage. (Reporting by Lamine Chikhi; Editing by Tom Pfeiffer and Mark Trevelyan)

AlertNet news is provided by