Peugeot confirmed Thursday it is in talks with Chinese giant Dongfeng about a shareholder tie-up, while GM announced it was dropping its 7 percent stake in the loss-making French carmaker.

PSA Peugeot Citroen, the second-biggest carmaker in Europe after Volkswagen of Germany, stressed that there had not been any agreement on a tie-up and that the talks were at a preliminary stage, but GM's statement said Peugeot no longer needed its support.

A tie-up with Dongfeng would give Peugeot a much-needed cash injection, and also cement its relationship with China's second-biggest carmaker and boost its access to the fast-growing market.

Dongfeng, for its part, has only said that it is studying the rationality of taking a stake in Peugeot.

A source familiar with the talks said the amount of the capital injection being considered is 3.5 billion euros ($4.8 billion).

The most probable scenario would involve Dongfeng and the French state in equal measure buying up a majority of the newly-issued shares, with other French investors taking the rest, said the source.

As the European car market and its sales remain stuck in a slump, Peugeot has moved to revamp its management and there has been talk of a major shake-up in the ownership of the company.

Reports in recent months have hinted at a sharp reduction in the holding of the Peugeot family, which controls about a quarter of the shares and 38.1 percent of the voting rights, losing its controlling interest.

Peugeot will "remain French", Industrial Renewal Minster Arnaud Montebourg said on the reports of the Dongfeng talks. The Prime Minister's office said it was following the talks "very closely".

In a surprise move US carmaker General Motors announced Thursday it is selling its entire 7 percent stake in Peugeot.

GM explained the move by saying its equity support was no longer needed, but a capital injection would also dilute its holding and value.

"Our equity stake was planned to support PSA in their efforts to raise capital at the time of the creation of the GM and PSA alliance, and that support is no longer needed," said GM Vice Chairman Steve Girsky.

The alliance, which dates to March 2012, aimed to improve both companies' positions in Europe after the regional market plunged into a deep slump, weakening many major automakers there, including GM's loss-making German unit Opel.

The two have been laying plans to achieve savings by pooling purchases of parts and jointly developing new auto platforms.

Girsky stressed this cooperation would continue.

"The alliance remains strong with our focus on joint vehicle programs, cross manufacturing, purchasing, and logistics. We're making good progress while remaining open to new opportunities."

Peugeot later acknowledged GM's announcement of the disposal of the share stake "as well as the strong commitment GM reaffirmed to our strategic alliance."

French Finance Minister Pierre Moscovici said "what is important is the industrial partnership between PSA and GM, which has been strengthened."

While announcing Thursday progress in their joint endeavours, GM and Peugeot also said they have decided to drop plans to develop one joint platform for a small car.

This will result in the savings from their cooperation coming in at around 1.2 billion euros instead of the 2.0 billion by 2018 that was previously being targeted.

Peugeot shares fall

Shares in Peugeot nosedived 7.6 percent Thursday to 10.63 euros, on a Paris market that lost 0.43 percent overall.

In addition to the prospect of a capital injection that would dilute their shares, traders were also disappointed by an announcement by the carmaker that it would have to write off about 1.1 billion euros from its full year earnings due to worsening markets and unfavourable exchange rates in Russia and Latin America.

"The impairment charges, which may represent around 1.1 billion euros, will reduce consolidated results by the same amount but will not involve any cash-out," said the company.

It had been looking to other parts of the world, such as China and Argentina, for growth.

But the group said on Thursday that current exchange rates were unfavourable.

A one percentage point change in the euro against other currencies, including the Brazilian real, the Argentine peso and the Russian ruble, will have "an impact of around 80 million euros on Automotive Division recurring operating income based on current market conditions".

Peugeot lost 426 million euros ($566 million) in the first half of the year. It reported a full year loss of 5.0 billion euros for 2012, and its finance arm had to be rescued with government support.

Western automakers have been looking beyond Europe and the United States for growth as sales in their home markets have collapsed amid a series of economic crises.

China, with its forecast potential to grow to a automobile market of 22 million units by 2020, is a natural magnet for these groups.

Peugeot already has a joint venture with Dongfeng to make cars in China. But Dongfeng sealing earlier this month a similar deal with rival French auto group Renault raised questions over whether it would go ahead to deepen its involvement with Peugeot.

Earlier in December, Dongfeng and Renault announced a $1.3-billion joint venture which include the production of 150,000 multi-purpose vehicles and engines a year.

The Dongfeng group, including its joint ventures, sold a total of 3.08 million vehicles in China last year, according to industry group China Association of Automobile Manufacturers, giving it around a 16 percent market share.

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