PARIS (REUTERS) - PSA Peugeot Citroen will remain French, Industry Minister Arnaud Montebourg said on Tuesday, days after sources said the loss-making firm was in talks with China's Dongfeng and the French government over a capital increase.

Peugeot is eyeing a possible deal under which China's state-owned Dongfeng Motor Co and the French government could each contribute 1.5 billion euros (S$2.5 billion) and acquire 20 to 30 per cent of the carmaker, sources close to the matter have said.

Under such a plan, the Peugeot family would lose control of the company because the cash injection would dilute its 25.4 per cent stake and 38.1 per cent in voting rights.

"PSA will remain a French company," Mr Montebourg told Le Parisien daily in an interview.

Asked if that meant there would be no Chinese investment in Peugeot's capital, Montebourg said: "I didn't say that. What I'm saying is that the company will stay in France and will remain French." Peugeot has confirmed it is studying new industrial and commercial projects with different partners but has not given any detail and has not confirmed talks over the 3-billion euro capital increase plan.

Paris-based Peugeot, which is slashing jobs and plant capacity, entered an alliance with General Motors last year and sold a stake to the United States carmaker in a 1 billion euro capital increase.

GM scaled back cooperation with Peugeot months into their alliance and later turned down a government-backed merger, people familiar with the matter said.

The Peugeot family has indicated it was ready to give up control as the company carried out initial soundings on a Dongfeng tie-up, while attempting to revive talks on a deeper alliance with GM.