* Former official, two arms dealers arrested
* Arms spending contributed to Greek debt woes
* Scandal touches raw nerve with austerity-hit Greeks
By Harry Papachristou
ATHENS, Jan 3 (Reuters) - Greece will overhaul arms procurement to make it more transparent, Defence Minister Dimitris Avramopoulos said on Friday, after a wide-ranging corruption inquiry led to the arrest of a former defence official and two arms dealers.
Heavy arms spending was one of the reasons Athens piled up debt and had to be rescued with European Union and IMF bailouts totalling 240 billion euros ($328 billion) in 2010 and 2012.
These were accompanied by strict conditions that have increased poverty and unemployment, so the scandal has touched a raw nerve with many Greeks.
Avramopoulos said the ministry's proposals would be submitted to parliament "in the immediate future".
His statement followed court testimony by Antonis Kantas, deputy armaments chief at the ministry between 1997 and 2002, who openly admitted to taking $16 million in bribes relating to arms deals with foreign companies from countries including Germany, France, Russia, Brazil and Sweden.
Two arms dealers named by Kantas, who was arrested and charged with graft in December, appeared in court on Friday to respond to bribery charges.
One of the pair, 83-year-old Panagiotis Efstathiou, admitted before investigating judges to bribing Kantas and also making payments to at least seven high-ranking officers of the Greek armed forces, according to a transcript of his testimony obtained by Reuters.
Efstathiou, who was released on 500,000 euros' bail, said he paid the bribes on behalf of German defence company Atlas. The firm told Reuters in a statement on Monday it was carrying out an internal investigation into the matter and would then "decide on the steps to follow".
Kraus-Maffei Wegmann (KMW), another German company named by Kantas according to his testimony obtained by Reuters, said in a statement on Friday it was also carrying out investigations. "KMW has neither paid bribes nor made anyone pay bribes, and obliges its employees and business partners to strictly comply with the law," it said.
The second arms dealer interrogated on Friday, 78-year old Dimitris Papachristos, was detained in jail after his testimony in which he also admitted he paid Kantas, according to court sources.
According to Kantas's testimony and court sources, Papachristos represented Wegmann in Greece at the time alleged bribes were paid.
Greece had the highest defence expenditure in the European Union in relation to economic output over the past decade. Its military spending stood at about 4 percent of output in 2009, when its debt crisis started. Most contracts were awarded to foreign companies.
Athens has already convicted a former defence minister and Kantas's immediate superior at the ministry for money laundering. ($1 = 0.7322 euros) (Additional reporting by Karolina Tagaris in Athens and Sabine Siebold in Berlin; Editing by Mark Trevelyan)