* Company plans capital increase, stake sale to Dongfeng and govt.
* Chairman Thierry Peugeot had championed alternative plan
* Peugeot aims to approve deal on Feb. 18
(Adds details, background)
PARIS, Feb 6 (Reuters) - PSA Peugeot Citroen's board has given Chief Executive Philippe Varin its backing to continue tie-up talks with China's Dongfeng Motor Group , the French carmaker said on Thursday.
The restatement of the board's support for a planned capital increase and stake sale to Dongfeng and the French government follows reports of divisions among the controlling Peugeot family over the draft deal.
At a meeting on Wednesday, Peugeot directors "expressed full support for the plan presented by the management team and authorized it to pursue negotiations with a view to an approval by the board on Feb. 18", the company said in a statement.
Peugeot, hit hard by Europe's six-year market slump, needs fresh funding to stay competitive and is pursuing talks on a deeper relationship with Dongfeng, its existing partner in a Chinese joint venture.
The two carmakers have been in discussions for months to extend cooperation to other Asian countries, backed by a 3 billion euro ($4.1 billion) share issue in which Dongfeng and the French government would acquire matching stakes.
Chairman Thierry Peugeot had championed an alternative plan that would have raised more of the cash on the market and reduced the holding sold directly to the French state, a source familiar with the matter had said.
Earlier this week a prominent French shareholders' rights group, ADAM, voiced concerns about governance problems posed by the arrival of two new major shareholders and the dilution of existing investors entailed by the operation.
Varin is due to be replaced by CEO-in-waiting Carlos Tavares, a former Renault second-in-command, once the Dongfeng deal is complete. ($1 = 0.7353 euros)
(Reporting by Laurence Frost; Editing by Alexandria Sage and Anthony Barker)