UPDATE 2-Russia may allow Renault to control AvtoVAZ -source

* Source says Renault ready to increase stake

* Renault says maintaining current stake for now

* Opel deal failure to ease Russian pressure on Renault

* Government injecting $1.5 billion into AvtoVAZ from budget

(Adds Renault, Putin on Opel, analyst, detail)

By Darya Korsunskaya

MOSCOW, Nov 4 (Reuters) - The Russian government could allow French group Renault (RENA.PA) to buy control of AvtoVAZ (AVAZ.MM) as part of a plan to save the ailing carmaker, a Russian government source told Reuters on Wednesday.

The move could make Renault Russia's top foreign partner in the car industry after the decision by General Motors not to sell Opel to a Russian-Canadian group dealt a blow to Kremlin's plans to modernise the auto sector. [ID:nL4519517]

"At the end of the day the government will search for a strategic investor -- and it will likely be Renault," said the source, who asked not to be identified. "They (Renault) are ready to increase their stake and are looking at the option of increasing to a controlling stake," the source said.

Renault currently has a 25 percent stake in AvtoVAZ, Russia's largest carmaker which has been hammered by tumbling car sales in the worst Russian recession since the mid 1990s. The government and brokerage Troika Dialog own 25 percent each while the rest is freely floated.

A Renault spokeswoman said the company already viewed itself as a strategic partner for AvtoVAZ, given its 25 percent. "We maintain this participation. Our contribution to restructuring will be through technology, equipment, know-how and platforms."

AvtoVAZ wants to cut a quarter of its workforce in Togliatti -- a city on the river Volga that only exists for the plant's workers -- to cope with plummeting sales and heavy debts.

The Kremlin has been reluctant to allow the firm to proceed with job cuts fearing they could lead to mass unrest that would hit support for the government of Prime Minister Vladimir Putin.

PRESSURE ON RENAULT TO EASE

Putin said on Wednesday he was surprised by GM's decision not to sell Opel after months of negotiations with a consortium of Magna MGa.TO and Sberbank SBER03.MM, and hinted the battle was not over [ID:nL4159263]

Russia has repeatedly said the sale of Opel to a Russian-backed group would show the readiness of U.S. President Barack Obama to boost economic ties with Russia and reset political relations with Moscow.

"The failure of the Opel deal certainly takes pressure off Renault compared to when the Opel deal looked safe," said Chris Weafer, chief strategist at Uralsib brokerage.

Putin has called on Renault to commit money or see its stake in AvtoVAZ diluted. On Tuesday, he said AvtoVAZ's shareholders, both Russian and foreign, should come up with an adequate development programme.

Weafer said the Opel fiasco would prompt the Kremlin to treat Renault more carefully in the future.

Putin said this week the government would help AvtoVAZ settle debts and could raise $2 billion on the market to support it. [ID:nL3702206]

The government source told Reuters some 43 billion roubles ($1.47 billion) would come directly from the federal budget.

AvtoVAZ has repeatedly warned of bankruptcy after experiencing a 44 percent fall in car sales since the beginning of the year while grappling with about 60 billion roubles of debt. [ID:nLJ63362]

Renault, which has an alliance with Japanese carmaker Nissan Motor (7201.T), has said it is not ready to commit cash but would rather contribute technologies. [ID:nL2169935] (Reporting by Darya Korsunskaya and Alexei Kalmykov in Moscow and Helen Massy-Beresford in Paris; Writing by Dmitry Zhdannikov; Editing by Dan Lalor) ($1 = 29.23 roubles)