UPDATE 1-Peugeot, Changan in China auto manufacturing JV deal

* PSA, Changan sign initial deal for China auto JV

* JV to make light commercial vehicles and cars

* Deal to boost competitiveness of PSA and Changan (Recast with confirmation from PSA and Changan)

By Fang Yan and Jacqueline Wong

SHANGHAI, May 6 (Reuters) - French carmaker PSA Peugeot (PEUP.PA) has reached an initial agreement to set up a 50-50 vehicle manufacturing venture with China Changan Automotive Group as it speeds up expansion in the world's largest auto market.

The China venture will make light commercial vehicles and cars, the companies said in a joint statement on Thursday, confirming an earlier Reuters story.

The partners are still in discussion over the financial details of the venture, it said.

PSA Peugeot, which already operates a car venture with Dongfeng Motor Group Co (0489.HK), lags larger rivals General Motors [GM.UL] and Volkswagen AG (VOWG.DE).

The lastest deal, if it goes ahead as planned, will enable it to secure a foothold in China's fast-growing light commercial vehicle market, where GM and Ford Motor Co (F.N) already have a head start.

It will improve the competitiveness of Changan, parent of Chongqing Changan Automobile Co (000625.SZ), which runs a three-way tie up with Ford and Mazda Motor (7261.T).

China, which eclipsed the United States as the world's biggest auto market last year, has been a major bright spot amid a global industry downturn and a safe haven for foreign auto giants.

GM, which already makes cars and light commercial vehicles with China's major auto groups SAIC Motor Corp (600104.SS) and FAW Group, is now selecting a site for a greenfield China plant, executives had said.

Ford Motor in September last year broke ground for its third China plant.