* Daimler seeks 10-20 pct in BAIC Motor-source
* Move would be part of planned BAIC Motor flotation
* BAIC Group aims to list passenger car unit in 2013
* Daimler tries to overcome weakness in Chinese market
By Arno Schuetze and Edward Taylor
FRANKFURT, Jan 11 (Reuters) - Daimler AG is eyeing a stake in the passenger car unit of its Chinese partner BAIC Group as part of efforts to boost its position in the world's largest car market, three people close to the plans said.
BAIC is planning a flotation of its BAIC Motor unit and Daimler - parent of luxury marque Mercedes-Benz - could take a stake as part of that process, giving it greater exposure to the Chinese market, the sources said.
While China has become Mercedes-Benz's No. 3 market after Germany and the United States, it trails its rivals BMW and Audi (part of Volkswagen ) there in terms of sales.
"When BAIC Motor is floated, Daimler may take a stake of 10 to 20 percent," one of the sources said on Friday, adding the size of the stake depended on discussions with its Chinese partner.
Daimler declined to comment, while BAIC, China's fifth- largest automaker, was not immediately available.
State-controlled BAIC's chairman Xu Heyi told Reuters in September the group aimed to list BAIC Motor in 2013, hoping to raise around 10 billion yuan ($1.6 billion).
Two sources close to the transaction said BAIC Motor is expected to be listed in Hong Kong this year, while other sources cautioned that an initial public offering (IPO) may be delayed until next year.
Goldman Sachs and Morgan Stanley have been mandated to organise the listing, the sources said.
A BAIC investment may help Daimler get its ailing China business back on track. "Daimler would get a stake in a fast-growing low-cost car maker, which may gain significantly in importance within the next decade," NordLB auto analyst Frank Schwope said.
Last year, Daimler decided to merge its two Chinese sales networks - one for cars imported from Germany and another for cars built locally with BAIC - into a single operation.
The group in December also named Hubertus Troska, a 24-year company veteran, to address its China woes, at a time when demand for top-end vehicles is forecast by market research firm IHS Automotive to grow to 2.7 million cars a year by 2020.
BAIC's chairman said last year it would use proceeds from the IPO, which would mean it following rivals Dongfeng Motor Group Co and Geely Automobile Holdings Ltd on to the Hong Kong stock market, to develop its own passenger car business.
Under partnerships with Daimler and Hyundai Motor , BAIC makes Mercedes and Hyundai-branded cars for sale in China and also has its own-brand small car, the E150.
In 2009, China eclipsed the United States as the world's largest auto market by volume, but Chinese automakers still rely heavily on locally made foreign brands.
Daimler shares - which paired earlier gains and traded up 0.3 percent at 1400 GMT - rose earlier this week to a nine-month high following a Chinese media report that the country's sovereign wealth China Investment Corp fund was looking into buying a stake in the German group.
A person familiar with the matter told Reuters the report was without merit.