Volkswagen is shifting its expansion in China to the western region where Europe's largest car maker needs more production bases to strengthen its dominance in the world's biggest auto market.

Chief Executive Officer Martin Winterkorn will sign a contract in Germany on Monday with visiting Chinese Premier Wen Jiabao on building a new car plant in the province of Xinjiang, people familiar with the matter have said.

The factory, which sources said last week may cost VW less than 300 million euros (245.7 million pounds), is only part of our go-west strategy, VW sales chief Christian Klingler said late on Sunday at a company presentation in Beijing.

We believe there's great potential for car sales in western China, Klingler said.

VW, the first overseas car maker to enter China three decades ago, is currently building factories in Foshan, Yizheng and Ningbo to strengthen representation in southeastern China. The German company, which aims to spend 14 billion euros on new factories and products in China through 2016, has only one plant in western China in the city of Chengdu.

China is VW's biggest market where the manufacturer of the Golf compact boosted group deliveries by almost 18 percent last year to a record 2.3 million including vehicles from luxury division Audi and Czech unit Skoda.

VW, leading General Motors and Ford by sales in China, aims to increase deliveries to 3 million units until 2014 as part of its goal to become the world's biggest car maker no later than 2018.

China remains an extremely rewarding market for us, Klingler said. We do need those extra capacities.

The new plant in Xinjiang, to be sealed during Premier Jiabao's visit with German Chancellor Angela Merkel to VW's headquarters in Wolfsburg, has an annual capacity of about 50,000 vehicles, a company official said last week on condition he not be identified.

CEO Winterkorn and Jiabao will also sign a contract to extend VW's joint venture FAW Automotive Company Ltd by 25 years, a government official has said.

(Reporting By Andreas Cremer; editing by Philippa Fletcher)