GM Opel U-turn awkward for Merkel but no disaster

* Shock GM decision announced day after Merkel met Obama

* Merkel needs to win May 2010 vote in Opel state

By Paul Carrel

BERLIN, Nov 4 (Reuters) - General Motors' decision to keep its European unit Opel is embarrassing for German Chancellor Angela Merkel, who had lobbied for a sale, but the U.S. group's U-turn deals no lasting blow to her new government.

GM's shock decision dominated German news bulletins on Wednesday and completely overshadowed Merkel's address a day earlier to a joint session of Congress in Washington -- a speech that was well received in the United States.

The German government and local politicians -- taken by surprise as was Merkel herself -- were furious at the U.S. carmaker's change of mind, and German unions tore up a deal to cut costs in protest.

Merkel invested much political capital over the last year to secure a deal for GM to sell the troubled Opel unit to a group led by Canada's Magna, though she did so under pressure from her Social Democrat rivals in the run-up to September's election.

But many Germans resent GM for its role in Opel's steady decline from its position as Germany's top car brand in the 1970s, and their anger at the management shifts some of the attention from Merkel.

"I think Germans are taking a practical view of this," Gerd Langguth, political scientist at the University of Bonn and biographer of Merkel, said of GM's reversal.

"Psychologically it is a problem, but I don't regard it as a serious problem (for Merkel) because a lot of Germans were in any case unhappy with the policy on Opel," he added. "A lot were asking themselves why state help for Opel was necessary."

MANY OPPOSE BIG-COMPANY AID Merkel's previous government made billions of euros in public funds available to support companies hit by the financial crisis, but many taxpayers oppose this money being used to prop up big corporate names while small- and mid-sized firms suffer.

One concern for Merkel, who was re-elected in September but switched coalition partners to the Free Democrats (FDP), will be the future of an Opel plant in Bochum in Germany's most populous state of North Rhine-Westphalia (NRW).

The plant is seen at risk of closure and the prospect of job losses could cost her conservatives votes in the state election in May 2010.

If Merkel's party loses power in NRW, her government would no longer enjoy a centre-right majority in the upper house of parliament, allowing opposition parties to block legislation.