UPDATE 1-Fiat to produce cars in China with Guangzhou Auto

* Producing cars from second half of 2011

* Total investment over 400 million euros

* First model will be Linea sedan

(Adds details from statement)

ROME, July 6 (Reuters) - Italian car maker Fiat SpA (FIA.MI) agreed a 50-50 venture deal with China's Guangzhou Automobile Industry Group to produce cars and engines in China from the second half of 2011, with a total investment of 400 million euros ($559.1 million).

Fiat, which has just taken a 20 percent stake in U.S. auto maker Chrysler, said the plant would produce 140,000 cars a year and around 220,000 motors after a first phase of development.

It said output could be increased to a maximum of 250,000 cars and 300,000 engines per year. The first model to be produced will be the Linea small family car.

Fiat has long sought a strong partner in China, where car sales are booming in contrast to slack demand in Europe and the United States.

It pulled out of a joint venture with Nanjing Automotive in 2007, then in March 2009 a planned venture with Chery Automobile Co was postponed by the Chinese company.

Fiat and Chrysler combined have production of about 4.2 million cars a year and together rank fifth equal to Korea's Hyundai Motor Co (005380.KS) among world car makers.

China's car sales soared 47 percent year-on-year in May to 829,100 units.

Fiat said the new plant would be built in Changsha, capital of Hunan province. The project is eligible for support from the Chinese government.

Fiat shares were down 2.8 percent at 6.87 euros by 1206 GMT as the DJ Stoxx index of auto shares .SXAP lost 2.7 percent. (Additional reporting by Francesca Piscioneri in Rome; Editing by David Holmes)