* Peugeot to seek more capacity cuts in union talks
* VW says Europe could do with shutting 10 factories
* Carmakers see European demand bottoming out
* Recovery expected to be modest and take years
By Andreas Cremer and Laurence Frost
FRANKFURT, Sept 10 (Reuters) - European carmakers need to close more factories and cut more jobs, executives at the Frankfurt car show said on Tuesday, warning any recovery in demand was likely to be long and slow as unemployment remained high and bank lending weak.
The bosses of automakers including Volkswagen, PSA Peugeot Citroen, and Ford Europe said on the opening day of the biennial event that sales in Europe appeared to be stabilising after five years of decline.
But recovery was not assured and likely to take years with the industry still needing to cut capacity to staunch losses at some manufacturers and ease price pressures on all, they added.
Peugeot, which incurred the wrath of French ministers and workers last year by scrapping a major factory and 8,000 jobs, said it would seek more capacity cutbacks from unions.
Volkswagen (VW) chief Martin Winterkorn said the European industry could do with closing around 10 factories, although he stressed the German carmaker itself did not need to make cuts thanks to strong growth in the United States, China and Russia.
"Europe still has to be viewed with scepticism," he said, adding sales across the region were down about 3-3.5 million since 2007.
"Basically, it's 10 factories that could be closed ... Thank God there are other areas we have growth," he added.
Peugeot, which lost 5 billion euros last year and clung to life with a share issue and French bailout, is more exposed to weaker southern European markets than many rivals, and also has less of a presence in the more robust luxury car segment.
Its CEO, Philippe Varin, said shutting down more production lines were "exactly the discussion we are having", but added he would present any cutbacks to unions before announcing details.
Unions reacted with surprise.
"Downsizing has already happened as far as I'm concerned, so I'm astonished that it's coming up again," said Franck Don, an official with the moderate CFTC union.
Despite signs of improvement in the euro zone economy, car sales fell in Germany, France, Italy and Spain in August, casting doubt over consumers' willingness to spend amid record high unemployment.
Varin said Peugeot's orders had stabilised so far this month and predicted Europe would return to "slightly positive growth" in 2014. That helped to drive Peugeot's shares more than 4 percent higher, as traders scrambled to unwind their bets against the company.
Shares in VW, Europe's biggest carmaker, and German rival BMW also rose, as they pointed to robust demand elsewhere in the world.
BMW reported a 15 percent jump in August sales to its highest ever total for the month.
Strong sales in North America and China, particularly of premium cars, have helped VW and BMW to continue investing through the downturn in Europe, and the fruits of that spending are on show in Frankfurt this week, with a raft of new German models on the stands.
Daimler Chief Executive Dieter Zetsche told Reuters he expected profit margins at the Mercedes-Benz luxury car business to improve further next year due to a rejuvenated model range.
"We will see a continuation of our steady improvement in profitability," he said in an interview.
BMW boss Norbert Reithofer remained downbeat about prospects in Europe, however.
"At the moment, the problem child is Europe. We do not yet see a light at the end of the tunnel this year," he said, adding any improvement in the region was unlikely until the second half of 2014.
Ford Europe boss Stephen Odell also cautioned any upturn in Europe was likely to be modest and take years.
"Our view is that over the next five years we see a modest recovery, about 20 percent of the industry from the base," he said in an interview with Reuters Digital Video.