UPDATE 1-Peugeot offers guarantees on French plants - unions
* Peugeot pledges to avoid plant closures in 2014-16
* CEO says capacity cuts likely at some sites -unions
* Domestic production investment to rise, company says
(Updates with comments on plant downsizing, details, background)
PARIS, Sept 25 (Reuters) - PSA Peugeot Citroen has pledged to keep all its French plants open but hinted it may halt a production line in Mulhouse as it reins in excess capacity, union officials said after talks with Chief Executive Philippe Varin on Wednesday.
The French carmaker, which has already closed a major assembly plant as it struggles to recover from a crippling European sales slump, is preparing the ground for further politically sensitive cutbacks.
In the latest round of talks on a new labour deal, Varin said the reduction in size of factories to one production line from two "can be envisaged at plants below 250,000 vehicles (annual output)", two of the people present told Reuters.
The company forecast production of 190,000-230,000 vehicles in Mulhouse, eastern France and 240,000 to 270,000 at the Poissy plant near Paris, said CFTC union official Franck Don and Jean-Allart Gillet of the CFDT.
A Peugeot spokesman declined to comment on the remarks or on an upcoming round of talks on possible capacity cutbacks.
The Paris-based company lost 5 billion euros ($6.6 billion)last year but said on July 31 it expected to beat its 2013 goal of halving industrial cash burn to 1.5 billion euros.
In a presentation to analysts the same day, Varin indicated that further cutbacks were on the way as the company targets 100 percent capacity utilisation across Europe by 2016.
Peugeot is seeking union concessions including wage restraint, working time flexibility and increased used of internal transfers between sites. The company opened the talks in May and hopes to reach a deal next month.
In return Peugeot on Wednesday offered workers guarantees that every French production site will remain open for at least three more years and get work on new vehicle models.
Overall production investment in France will rise to 1.5 billion euros from 1.1 billion in the preceding three-year period, it said.
The company also pledged to assemble 1 million vehicles in France annually, a 7.5 percent increase on its 2013 forecast.
That still amounts to just 54 percent of Peugeot's domestic production capacity of 1.85 million vehicles, based on 2012 company data excluding the halted Aulnay plant north of Paris.
"The commitment to maintaining and increasing production output in France goes hand in hand with a critical need for flexibility in our plants and (the) target for capacity utilisation," Peugeot said.
(Editing by James Regan and Greg Mahlich)