PSA Peugeot Citroen
and Toyota <7203.T> are in talks to share vehicle production at a factory in northern France, President Nicolas Sarkozy said in a newspaper interview.

Sarkozy, who last week summoned Peugeot Chief Executive Philippe Varin for discussions on another threatened plant, told La Voix du Nord that the Sevelnord facility was likely to be saved by the new partnership.

Sevelnord will be OK, the French president was quoted as saying, before adding that he had raised the plant's future with Varin. My understanding is that there's a deal in discussion with Toyota for light commercial vehicles.

The French president did not say whether Toyota was the only potential Sevelnord partner in talks with Peugeot.

Europe's auto industry is grappling with excess capacity and cut-throat price competition as overall demand sags under the weight of the debt crisis. All major car makers except Volkswagen lost money in the region last year.

Auto workers at Peugeot and alliance partner General Motors are bracing for a fight with management as both car makers prepare to cut European capacity.

The Sevelnord factory near Valenciennes employs some 2,800 workers and produces Peugeot Expert, Citroen Jumpy and Fiat Scudo delivery vans. The Italian automaker plans to withdraw from the venture in 2017, and Varin said in January that Peugeot needed another partner to take Fiat's place.

There's nothing definitive with any new partner, a Peugeot spokesman said on Wednesday, adding that the terms of Fiat's withdrawal had yet to be finalised.

Even if a new partner is found, we would need to ensure that the Sevelnord site is as competitive as possible alternatives, the spokesman said. He cited French labour taxes as a factor weighing on the plant's future.

Toyota, which has ruled out buying a stake in Sevelnord, declined to comment on Sarkozy's remarks or say whether there were plans for the factory to assemble vehicles under the Japanese automaker's brand.

Peugeot unions are seeking to put feared plant closures at the centre of France's presidential election campaign, which culminates with a second round of voting on May 6.

Sarkozy, trailing Socialist challenger Francois Hollande in opinion polls, summoned Varin for talks on April 14 after workers from Peugeot's Aulnay plant near Paris organised a protest outside his campaign headquarters.

(Reporting by Laurence Frost; Editing by David Cowell)