UPDATE 1-EU's Kroes warns against race for auto subsidies

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By Pete Harrison

BRUSSELS, Nov 21 (Reuters) - Europe's competition chief warned Germany and France on Friday against starting a race with the United States to subsidise the car industry.

Automakers around the world have warned that the economic fallout from the financial crisis is taking its toll on sales, leading to job cuts.

"I ask all governments to avoid the costly trap of a subsidy race," European Union Competition Commissioner Neelie Kroes said in a speech.

"We have all heard calls, particularly in France, Germany and the United States, for support to be given to the car industry," she added. "All governments have to resist that."

Her call came a day after U.S. automakers failed in their quest for a quick bailout of the big three -- General Motors GM.N, Ford Motor (F.N) and Chrysler LLC [CBS.UL], whose losses have mounted as Americans cut back on buying cars.

U.S. Democratic congressional leaders demanded executives provide a business survival plan in exchange for their support of up to $25 billion in loans.

Their European rivals have called for 40 billion euros ($50 billion) in soft loans, with General Motors' German unit Opel struggling for survival, but the European Commission has said any aid would have to be targeted and temporary.

Kroes said countries would simply export their problems to their neighbours by handing out poorly considered subsidies, and the EU had existing mechanisms that could help big automakers.

"R&D aid or environment aid, for example, would have the double benefit of helping the industry and helping address the problem of climate change," she said.

Cutting emissions from cars is a key part of ambitious EU goals of curbing overall carbon dioxide output by a fifth by 2020.

Kroes said a package of proposals from the European Commission next Wednesday aimed at tackling the economic downturn would include measures to help small and medium-sized businesses.

"Small and medium-sized businesses are the lifeblood of our economy, and they clearly need more help -- many of them are failing, not through any fault of their own, and we have to do something more to address that." (Reporting by Pete Harrison; editing by Dale Hudson)