* Guangzhou Auto may take up to 30 pct of Changfeng Motor
* Changfeng offers inland production base, SUV line-up
* China is encouraging auto sector consolidation (Adds quotes, details, background)
By Fang Yan and Edmund Klamann
SHANGHAI, May 19 (Reuters) - China's Guangzhou Automobile has reached an initial agreement with Hunan Changfeng Motor Co 600991.SS to take a major stake, possibly up to 30 percent, in the sport utility vehicle maker, a source with knowledge of the matter said on Tuesday.
The deal would make Guangzhou Auto, a partner of Toyota Motor (7203.T) and Honda Motor (7267.T), the largest shareholder of Changfeng, which has a market capitalisation of 5.78 billion yuan ($846.7 million), and help it to secure a foothold in the country's inland area, the source told Reuters.
Final terms of the agreement have yet to be hammered out but Guangzhou Auto's stake in Changfeng is unlikely to exceed 30 percent, said the source. Changfeng is currently 50.98 percent owned by its state-run parent.
Japan's Mitsubishi Motors (7211.T), which owns 14.59 percent of Changfeng, would remain a major shareholder after an equity deal with Guangzhou Auto, the source said.
A spokesman for Guangzhou Auto declined to comment, while Changfeng executives could not immediately be reached.
Changfeng's shares were suspended from trade on Tuesday pending an announcement of a major restructuring deal. They have nearly tripled since the beginning of this year, vastly outperforming a 47 percent gain of the benchmark index .SSEC.
Beijing has been encouraging mergers and acquisitions among the auto industry's more than 100 players, aiming to create a few national champions able to compete with global giants at home and overseas.
Big national auto groups such as Dongfeng Motor Group Co (0489.HK) and FAW Group, a China partner of Toyota and Volkswagen AG (VOWG.DE), have held merger talks with smaller peers.
Changfeng, an SUV specialist based in central China's Hunan province, had previously explored possible equity ties with several other suitors, said the source.
Domestic players such as Beijing Automotive Industry Holding Co, a Daimler AG (DAIGn.DE) partner, had also expressed interest in buying into Changfeng.
"The candidate has now been nailed down to Guangzhou Auto as it has deep pockets and very solid joint-venture partners," said the source.
Guangzhou Auto makes the Toyota Camry and Honda Accord sedans in tie-ups with the Japanese automakers in southern China.
Industry analysts said Changfeng, which supplies its Leopard SUVs to China's military, would fill a gap for Guangzhou Auto in SUVs, which are popular among young consumers in big cities.
It also would give Guangzhou Auto a production base in inland provinces where automobile demand has started to pick up as Beijing takes steps to encourage consumption through subsidies to rural households and other measures, they said.
Changfeng, with annual production capacity of 100,000 units, sold only 26,816 vehicles in 2008, up 4.01 percent from a year earlier, company data showed. ($1=6.826 Yuan) (Reporting by Fang Yan and Edmund Klamann)