* Fillon says France will intensify fight against al Qaeda
* Policy still to negotiate with hostage takers if possible
* Socialists back Sarkozy's handling of affair
* Mali said irked by French behaviour
(Updates with Kouchner talks in Mali)
By Paul Taylor
PARIS, July 27 (Reuters) - France said on Monday it was at war with al Qaeda's North African branch and will intensify military support for governments in the region combating the Islamist fighters who killed an elderly French hostage.
But Prime Minister Francois Fillon said Paris would continue to negotiate with hostage-takers whenever possible to save the lives of French citizens, provided their captors did not cross a "red line" by endangering their lives.
He was speaking in a radio interview a day after President Nicolas Sarkozy confirmed that Michel Germaneau, 78, kidnapped in Niger and held by al Qaeda in the Islamic Maghreb, had been killed following a failed French rescue mission in Mali.
"We are at war with al Qaeda and that's why we have been supporting Mauritanian forces fighting al Qaeda for months," Fillon told Europe 1 radio, saying that AQIM consisted of about 400 fighters operating in a desert area the size of Europe.
Asked what Sarkozy meant when he said the killing of the retired engineer would not go unpunished, the prime minister said: "It means the fight against terrorism will continue and will be reinforced."
Asked if Paris would retaliate militarily, he said: "France does not practice revenge."
Foreign Minister Bernard Kouchner, on a delicate visit to Mali, which was angered by Paris' apparent failure to consult it on the raid, promised better cooperation with countries of the Sahel region in combating terrorism.
"As for coordinated operations, if you can do (them), I am a supporter of doing them properly and for a long time," he said after talks with Malian President Amadou Toumani Toure.
He noted that Malian forces were part of a regional military coordination headquarters in Tamanrasset, southern Algeria, which was working to combat AQIM.
Sarkozy has said he decided to launch a raid into Mali with Mauritanian forces last Thursday only after failing to establish any negotiating channel with the kidnappers and because he feared for the hostage's life after an al Qaeda ultimatum.
The opposition Socialists said they would not criticise the government's action in the hostage affair. Only two small far left parties have condemned the use of military force.
"We have no quarrel to pick provided everything is done to protect both the security of our fellow citizens ... and of French territory," Socialist party spokesman Benoit Hamon told France-Inter radio.
Fillon said France was on maximum security alert and several attempted attacks were thwarted on French soil and in neighbouring countries each year.
However, Kouchner said he saw no increased threat of terrorism in France in the wake of the killing of Germaneau, who was kidnapped in Niger in April.
"I don't think we have the slightest bit of evidence of an increased danger," he told RTL radio in an interview.
The minister said he had not urged French nationals to leave the Sahel but had asked that they take increased safety precautions.
Malian defence officials voiced anger privately about the sidelining of their country, seen as a weak link in fighting AQIM due to a failure to crack down on groups based in the north and to reported links between some authorities and Islamists. "We do not understand why, in the case of Germaneau, France leaves us to one side and launches a military operation with Mauritania, which ended up being a failure," a senior official in Mali's defence ministry told Reuters.
"Everyone knows that the failure of the operation guaranteed the death of the hostage." (Additional reporting by Tiemoko Diallo in Bamako and Vicky Buffery in Paris; Editing by Myra MacDonald)