Workers at a Hyundai Motor engine factory have suspended production there after an employee set himself on fire to protest the company's alleged suppression of union activities, Hyundai's labour union said on Monday.

The incident indicates labour issues remain a potential vulnerability for the strongly performing South Korean carmaker, although it avoided strikes for a third year in a row last year.

The worker and union member with the surname Shin was found in flames at the plant in the southeastern city of Ulsan at around noon on Sunday, and is currently in critical condition at a hospital in nearby Busan, Hyundai's union said in a statement.

We suspended production at the engine plant after the incident took place. The situation is serious and the suspension could be prolonged unless the company accepts our demands including preventing suppression of union activities from happening again, a union official said.

A company spokesman said the move would not affect engine production as the plant, which produces diesel engines for Hyundai's Veracruz SUVs, was relatively small and inventory and other plants could compensate for stoppages.

The police are investigating the case and we are keeping an eye on the probe, a Hyundai Motor spokesman said.

(Reporting by Hyunjoo Jin; Editing by Jonathan Hopfner)