* Loss-making Fnac long seen as tough sale
* Government concerned about possible job losses
* PPR shares rise as much as 3 pct
* PPR confirms board meeting to study options for Fnac
(Adds PPR's confirmation of board meeting)
By Pascale Denis and Astrid Wendlandt
PARIS, Oct 8 (Reuters) - French group PPR plans to sell its declining Fnac music and book retailer, a source familiar with the matter said, to focus on its more profitable luxury and sports brands such as Gucci and Puma.
The board will meet on Tuesday to discuss splitting off Fnac, which analysts estimate could be worth up to 800 million euros ($1 billion), the source told Reuters on Monday. It will then present the plan to employees, the source said.
PPR confirmed it plans to hold a board meeting on Tuesday "to study the strategic options concerning Fnac."
PPR, the world's third-largest luxury group behind LVMH
and Switzerland's Richemont , has been trying to sell its various retail businesses for several years to concentrate on its luxury and sports brands which have stronger growth prospects.
Analysts and bankers have said getting rid of Fnac would be particularly difficult as the unit's sales and profits have been dwindling steadily, hit by music piracy and fierce competition from the Internet.
PPR would also face resistance to any job losses at Fnac from the government, which is trying to fight rising unemployment and putting pressure on companies to safeguard jobs.
Labour minister Michel Sapin said on Monday he was closely watching PPR's decision to cut ties with Fnac and its impact on jobs.
Fnac, which has outlets in Brazil, Italy, Spain, Switzerland and Belgium, employs 18,000 staff, with about 12,000 in France.
"The exit plan is not completely decided," the source said, adding PPR aims to seek shareholders' approval at next year's annual general meeting in the spring.
PPR could put Fnac's assets into a new legal entity which could either be sold to a third party - which analysts say would likely be a private equity firm - or listed on the stock market, the source said.
If Fnac applied for a separate Paris listing, PPR shareholders which include the Pinault family holding Artemis with a 40.7 percent stake, would receive shares in Fnac.
The scheme would be similar to that used by Carrefour
to spin off Spanish discount chain Dia which left the retail giant free to revamp its poorly performing French business.
"Fnac has a good chance of attracting private equity or industrial bids," a Paris-based trader said, citing a price of around 550 million euros.
Getting out of general retailing has been a long and painful process for PPR, whose initials stand for Pinault-Printemps-La Redoute, which began in 2006 with the sale of the Printemps department store.
Fnac, in which PPR started investing in 1994 and fully owned in 1996, was identified as a non-strategic asset three and a half years ago.
"At least we will know how much Fnac is really worth once it is no longer consolidated in PPR's accounts," said Catherine Gaigne from the Sud union, which represents Fnac employees.
Analysts at CM-CIC Securities put a value of 775 million euros on Fnac, or 6.1 euros a share, saying a spin-off was a suitable option given "the difficulty of selling this asset".
Others said an IPO was usually reserved for growth stories, not declining businesses, and that option seemed less likely.
Investors cheered the prospect of seeing PPR free from Fnac, sending the shares up as much as 3 percent. The stock closed 2 percent higher, the only gainer on a 1.4 percent weaker French blue-chip CAC 40 index .
The company, which owns fashion brands Yves Saint Laurent, Balenciaga, Bottega Veneta, Stella McCartney and Alexander McQueen, sold furniture retailer Conforama last year.
In July it raised 968 million euros by selling its remaining stake in distribution unit CFAO to Japan's Toyota Tsusho Corporation (TTC).
Last week, PPR Chief Executive Francois-Henri Pinault said he would update investors on plans to sell its Redcats unit - which owns mail order businesses La Redoute, Cyrillus and Vertbaudet - before Oct. 25.
Fnac, which also sells toys and home electronics, made an EBIT loss of 7.5 million euros in the half year to June 30 while PPR's luxury divisions made a profit of 727.1 million euros.
($1 = 0.7657 euros)
(Additional reporting by Christian Plumb, Blaise Robinson and Elena Berton; Editing by Erica Billingham and David Cowell)
Keywords: PPR FNAC/