(Adds French PM's office welcoming decision)
By Laurence Frost and Gilles Guillaume
PARIS, March 18 (Reuters) - PSA Peugeot Citroen's board agreed on Tuesday to nominate French civil servant Louis Gallois as its next chairman, sources said, as the carmaker prepares for a 3 billion euro ($4.2 billion) tie-up with China's Dongfeng Motor Group.
Gallois won the board's endorsement to replace Chairman Thierry Peugeot after the founding Peugeot family agreed to support the French government's choice of candidate, the sources said. A Peugeot spokesman declined to comment.
The French government welcomed the decision. Prime Minister Jean-Marc Ayrault's office said in a statement Gallois' experience and talent would be "an asset for PSA, which will need exemplary governance over the next few years".
Paris-based Peugeot last month announced a rescue deal in which it will sell shares to Dongfeng and the French government, reducing the family's stake to match their equal holdings of about 14 percent.
The family will see its board presence halved to two full members, Thierry and cousin Robert Peugeot, the sources said. Thierry's sister Marie-Helene will leave the board while another Peugeot cousin, Jean-Philippe, remains as a non-voting member.
Former Renault executive Carlos Tavares is taking over as chief executive from Philippe Varin later this month, with Peugeot also getting a new chairman under the deal's terms.
Gallois, France's investment commissioner who previously headed the SNCF state railway and defence group EADS, prevailed over former Nexans boss Gerard Hauser, the Peugeot clan's initial choice, the sources said.
As Le Figaro first reported last week, however, the family agreed to back Gallois over Hauser, a former board member at Peugeot-controlled Faurecia, after meetings with government officials.
Gallois has served on the Peugeot board since late 2012, when his appointment as a nominal independent was imposed on the company by President Francois Hollande's Socialist government in return for 7 billion euros in state loan guarantees.
His nomination will be submitted for formal approval by the new board on April 29 and by the Peugeot shareholder meeting, which may be brought forward to April 25 from April 30, the sources said.
The agreement underpinning Peugeot's capital increase and tie-up with Dongfeng is due to be finalised during a visit to Paris by Chinese President Xi Jinping next week. ($1=0.7180 euros) (Additional reporting by Julien Ponthus; Editing by Greg Mahlich and David Holmes)