UPDATE 5-Obama unveils sharp increase in auto fuel economy

* Auto makers' fleets must average 54.5 mpg by 2025

* "Most important step" to reduce foreign oil use-Obama

* Deal will lower U.S. fuel consumption by 2.2 million bpd

(Adds link to related story)

By Ayesha Rascoe and Deepa Seetharaman

WASHINGTON/DETROIT, July 29 (Reuters) - Several major auto
makers on Friday embraced the Obama administration's proposal
to push the industry further away from once-dominant gas
guzzlers to more lean and efficient vehicles.

The proposal, which is the result of months of negotiations
between the Obama administration and auto makers, would require
the companies to reach an average fuel efficiency across their
U.S. fleets of 54.5 miles per gallon by 2025.

"This agreement on fuel standards represents the single
most important step we've ever taken as a nation to reduce our
dependence on foreign oil," Obama said at an event announcing
the new standards.

Flanked by top auto maker executives, Obama said the new
rules would lower the country's oil use by 2.2 million barrels
a day over the next 15 years.

The rules will cut more than 6 billion tonnes of carbon
emissions for the duration of the program.

"Can we do it? Well, we put a man on the moon; of course we
can do this," said Fadel Gheit, senior analyst covering the oil
and gas sector at Oppenheimer. "If the will is there, we will
be successful and this is the best way to achieve this by
pushing and cajoling."

While fleets would be required to reach corporate average
fuel economy, or CAFE, standards of 54.5 mpg, under real world
driving conditions that can sap fuel economy, consumers will
likely get fewer miles per gallon in many cases.

The goal is still a major step up from current standards
that require auto makers to achieve 35.5 mpg by 2016.

"Many OPEC oil ministers are now having sleepless nights,
because of the millions of barrels of oil ... the U.S. will now
not be importing," Democratic Congressman Edward Markey told
Reuters in a telephone interview. Markey was co-author of the
law that mandated higher fuel economy standards.

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CHALLENGE FOR TRUCKS

The biggest auto sellers -- General Motors (GM.N), Ford
Motor Co (F.N), Chrysler, which is run by Italy's Fiat
(FIA.MI), Toyota Motor Corp (7203.T) and Honda (7267.T) --
have all backed the administration's plan.

The new program includes average increases in fuel economy
of 5 percent for cars and 3.5 percent for light trucks through
2021, with a 5 percent increase for all vehicles after that.

"We have a challenge on trucks, but we think this is a fair
way to handle it," Sue Cischke, Ford vice president for
sustainability and the environment, told reporters at the
event.

Mercedes-Benz, the luxury car line owned by German car and
truck maker Daimler (DAIGn.DE), did not back the new program,
saying it "clearly favors large SUVs and pickup trucks."

To meet the new targets, auto makers will have to cut
weight from their vehicles, develop smaller engines and boost
fuel efficiency through direct injection, start-stop technology
and turbochargers.

The Center for Automotive Research projected bringing cars
and trucks to a 56 miles per gallon CAFE standard would cost
about $6,700 per vehicle. The study has been criticized for
overestimating the cost of technologies.

"I have to really question the sanity behind that," Dennis
Virag, president of Automotive Consulting Group Inc, said of
the new CAFE standard. "It's going to be a very difficult mark
to achieve and I think it's going to be very costly."

The Obama administration declined to release any estimates
on Friday about how the proposal will impact the retail costs
of vehicles. It said it is still studying potential impacts and
will release details later.

The Environmental Protection Agency and Department of
Transportation, the agencies developing the new standards, will
release the full details of the program by the end of
September.

The agencies have pledged to undertake a comprehensive
mid-term evaluation of the standards before finalizing the
targets for cars and light duty trucks after 2021.

They are also considering implementing incentive programs
to promote electric and plug-in hybrid vehicles, and plan to
propose credits for efficiency improvements for air
conditioners.

For more than 20 years, aluminum producers have been
working with U.S. automakers to design more of the light weight
metal into cars to lower emissions.

Following Obama's announcement, Randall Scheps, chairman of
the Aluminum Association's Aluminum Transportation Group said
in a statement, "Vehicles downweighted with aluminum are
inherently more fuel efficient than heavier ones made from
steel. Several leading vehicles use all-aluminum bodies, and we
will see more vehicles go all aluminum in the next 10 years."
(Additional reporting by Malathi Nayak, Emily Stephenson in
Washington and Ben Klayman in Detroit and David Sheppard and
Carole Vaporean in New York; Editing by Alden Bentley, Sofina
Mirza-Reid and Lisa Shumaker)