Talks between GM, the world's biggest automaker, and European No.2 Peugeot are focused on sharing vehicles and parts rather than swapping stakes, according to the people. Any new shareholdings that emerged would be small and symbolic.
French Labor Minister Xavier Bertrand confirmed that the government had been informed about a possible strategic partnership, online newspaper La Tribune reported that the discussions had been taking place for months, and the news sent the French automaker's shares soaring on Wednesday.
Peugeot confirmed talks but would not name the partner, and GM spokeswoman Kelly Cusinato said We routinely talk to others in the industry but have no comment beyond that.
Peugeot shares jumped as much as 3 euros, or 21 percent, and were 13 percent higher at 1524 GMT, the biggest one-day gain in three years, while GM was down 0.1 percent.
As of Tuesday's close, Peugeot had declined 50 percent over the past 12 months - the worst performance on the 15-member Stoxx Europe autos and parts index <.SXAP>.
This alliance would be a game changer for Peugeot in the medium term, Natixis analysts said in a note to clients, raising their rating on the stock to buy from neutral.
While potential synergies have already been identified, Peugeot is treading cautiously to avoid building expectations after the 2010 failure of tie-up talks with Mitsubishi Motors <7211.T> in 2010.
Wholesale integration of Peugeot with GM's European Opel division would be fraught with political obstacles, observers warn.
The logical thing to do would be to close plants, said London-based Bernstein analyst Max Warburton.
But they've not been able to do it independently, and there's no reason to think they could do it together.
In his radio interview on Wednesday, the French labour minister said the government would seek to ensure any deal protected domestic jobs.
Like Peugeot, GM's European Opel division already faces heavy restructuring to reverse losses compounded by the region's slumping auto market and cut-throat price competition.
Peugeot's core automotive division swung to a 497 million euro ($659 million) operating loss in the second half, while GM Europe's $600 million fourth-quarter loss was little changed from the previous year's.
Facing similar overcapacity problems and dependence on Western European buyers, Peugeot and Opel have little to offer one another in the region, according to Credit Suisse analyst Erich Hauser.
We struggle to see how yet another 'me-too' cooperation with GM Europe on componentry will help address any of the fundamental issues, he said.
The Peugeot-GM alliance under discussion includes shared manufacturing beyond Europe, the sources said. It would amount to more than another product-specific deal of the kind Peugeot already has with Ford
Peugeot was forced this month to put its profitable logistics business up for sale to help finance the overseas expansion it badly needs to compensate for sagging home markets.
But the company also halted factory investments in Brazil and India, ostensibly to save cash, and Chief Executive Philippe Varin said the Indian project may be opened to a partner.
Peugeot could draw a line under ongoing Latin American losses and strengthen its Asian foothold by sharing plants, vehicles and parts with GM in those regions.
In return, Peugeot would offer its expertise in small petrol engines and vehicle chassis, said Florent Couvreur of Paris-based CM-CIC Securities.
Peugeot has said the future of its small car plant in Aulnay, north of Paris, is in doubt after 2014 because of the increasing wage cost gap with imports. GM's Chevrolet assembles its Aveo mini at a plant in Korea, a lower-wage export base with room for expansion.
Besides small cars, Peugeot has said it needs a new commercial van partner after Fiat's
Mirroring that situation, GM has been left in the lurch by Renault's
Fiat had last month fanned speculation of its own possible tie-up with Peugeot, with CEO Sergio Marchionne saying he would certainly take a look at the company.
But the French automaker has since reiterated its opposition to any tie-up that threatens the influence of the controlling Peugeot family - which holds almost one-third of its capital and half of the voting rights.
The Peugeots want to keep control, UBS analyst Philippe Houchois said. Carving out GM's European auto operations into a venture with Peugeot could be an elegant solution.
($1 = 0.7539 euros)
(Additional reporting by Philipp Halstrick in Frankfurt, So Young Kim in New York, Jennifer Clark in Milan, Gilles Guillaume and Elena Berton in Paris; Editing by Carol Bishopric, John Mair and Helen Massy-Beresford)