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* Unions welcome the news but unsure jobs will be saved
* French shareholders may retain a blocking power (Adds French finance minister's comment)
By Sybille de La Hamaide and Emmanuel Jarry
PARIS, Oct 12 (Reuters) - French trade unions said they are open to the prospect of the state taking a stake in loss-making auto-maker PSA Peugeot Citroen but said the key question was the survival of local jobs and control of the group.
They were reacting on Saturday after sources with knowledge of the matter told Reuters PSA was preparing a 3 billion euro ($4 billion) capital increase in which Chinese partner Dongfeng Motor and the French government would take matching stakes in the troubled carmaker.
Under the draft deal, which Peugeot hopes to conclude this year, state-owned Dongfeng and the French government would each contribute 1.5 billion euros and acquire 20 to 30 percent of the carmaker, the sources who asked not to be identified said.
French Finance Minister Pierre Moscovici, speaking to reporters on the sidelines of an annual meeting of the International Monetary Fund (IMF) in Washington would not directly confirm, nor deny the Reuters story.
"The strategy (of PSA) is defined by the management of the group, which declared it wanted to expand existing industrial partnerships, notably with two partners - General Motors and Dongfeng," Moscovici said.
"The issue today is not primarily about the French government or a car-maker buying into the (PSA) capital, but about developing good industrial partnerships for PSA," he said.
Officials at Dongfeng said they were unaware of such a proposal.
"If confirmed, it would be rather good news for the company because in any case it was absolutely vital to have a capital increase," Xavier Lellasseux, spokesman for PSA's second-largest union, CFDT, said.
Peugeot, among the worst casualties of a six-year European car sales slump, is seeking cooperation as it struggles to cut costs and losses that have threatened its survival.
The Paris-based company lost 5 billion euros ($6.6 billion)last year but said on July 31 it expected to beat its 2013 goal of halving industrial cash burn to 1.5 billion euros.
A Dongfeng stake would be a "sustainable solution", Christian Lafaye of Force Ouvriere union said, adding: "We can't deny that the Chinese have the wind behind them and the money."
However, Franck Bieri from the CGC management union warned that the consequences for the French market and labour force remained unclear.
"It might be enough to keep activities going but it's not certain it would save all the jobs ... PSA's market share is continuing to fall," he said.
Peugeot saw an 18 percent drop in August registrations that eroded its European market share to 11 percent for the first eight months of the year, down almost a percentage point year-on-year.
PSA employs some 78,000 people in France and has been in talks with unions about possible cutbacks in a European car market suffering from over-capacity.
Under the mooted plan, the capital increase would be accompanied by an expansion of DPCA, the Peugeot-Dongfeng joint venture in China, adding more Peugeot vehicles and technology to target other markets in the region, sources said.
The Peugeot family would lose control of the company because the cash injection would dilute its stake and voting rights.
"Will all French shareholders, including the government, keep a blocking power? That's the question," Lellasseux said.
"Because it would be good if there was still a control by all French shareholders which would limit the ambitions of one or the other incoming shareholders."
But left-wing union CGT, the largest in the company, was not optimistic that the arrival of new players, whatever their nationality, would improve things for the workers.
"Be it a French, Chinese, German or U.S. boss, their only policy is to make us work more with fewer people to ensure shareholders' dividends," the union's spokesman, Jean-Pierre Mercier, said. (Additional reporting by Jan Strupczewski in Washington; Reporting by Sybille de La Hamaide and Emmanuel Jarry; Editing by Mark John, Ron Askew and Sandra Maler)