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UPDATE 2-Opel "vital" for GM in Europe, not for sale

* GM rejects reported Fiat interest coming at delicate time

* GM to decide soon on Opel cost cuts, alliance with PSA

* Opel says aims to source more parts from PSA, not GM

* US legal requirements mean GM car parts expensive

(Adds analyst comments) By Christiaan Hetzner and Ben Klayman FRANKFURT/DETROIT, Oct 5 (Reuters) - General Motors Co

said on Friday its European brand Opel was "vital" forGM's future in Europe, dismissing once again speculation itmight sell the company should an alliance with French carmakerPSA Peugeot Citroen collapse.

GM has thrown its weight behind a restructuring of itsloss-making German business, rather than opt for a sale orclosure urged by some U.S. investors.

The U.S. company is pinning its hopes instead on expandingan alliance with former rival Peugeot beyond logistics toinclude joint procurement and vehicle development.

"Opel is not for sale. GM fully stands behind Opel," GM ViceChairman Stephen Girsky said in a statement sent by email.

Earlier on Friday, Italian daily Il Sole-24 Ore said in anunsourced report that Fiat SpA Chief Executive SergioMarchionne was ready to buy Opel if GM's alliance with Peugeotdissolves.

"Opel is a fully integrated part of GM's global footprintand vital for GM's future success in Europe. The GM-PSA allianceis fully on track," Girsky said in the statement.

Fiat had already tried unsuccessfully to acquire Opel in2009, and Chief Executive Sergio Marchionne has stated that massmarket carmakers can only survive in the long term if they cansplit ever rising development costs amongst a volume of between5-6 million new cars sold annually.

"I think a deal is incredibly unlikely, I don't see whatFiat have that Peugeot doesn't already bring to the table," saidCredit Suisse analyst Erich Hauser.

Fiat has no big European product launch coming until 2014with the Alfa Romeo Giulia, whereas Peugeot is coming with anall new 208 small car, he explained. Nor does the Italiancarmaker even have a midsize entry like PSA and Opel on whichcosts can be shared between brands.

"Fiat doesn't have the money to fund Opel's operations - itis the European carmaker with the most leveraged balance sheet,so GM would have to put money on top and why would they fundFiat to do this? I don't think GM is that desperate yet," hecontinued.

Morgan Stanley analyst Adam Jonas warned though that Opelhas cost GM about $16 billion over the past dozen years andforecasts another $1 billion in annual operating losses onaverage through 2021.

He argued that other carmakers have proven willing to bitethe bullet and spend heavily just to free themselves of toxicassets like Opel that threaten to mire them in chronic losses.

BMW coughed up nearly $3 billion to unload its UKbrand Rover in the 1990s while Daimler was willing to pay $9billion to convince U.S. private equity firm Cerberus to acquireChrysler in 2007.

JUST BELT, NO SUSPENDERS

"Marchionne realizes that there's no future for a lot of themass market in Europe unless there is a shared sacrifice andcommitment to have capacity exodus, and he's trying to be acatalyst to that," Jonas said.

Officials at GM were angered by the timing of the Fiatstory, wondering whether it was meant to scare away Opelcustomers and sow division between Opel on the one hand and PSA'with its Peugeot and Citroen brands on the other -- all threekey rivals of the Italian carmaker.

Opel has just begin selling the new Mokka subcompact SUVthat competes with the Fiat Sedici. More importantly, the GMbrand is set to launch the Adam lifestyle mini that directly isaimed at Fiat's popular 500 car.

Moreover GM and PSA are expected to decide in the comingweeks on joint procurement and engineering that can help improveannual results by about $1 billion for each company within aboutfive years time.

Separately, Opel interim CEO Thomas Sedran told theTagesspiegel newspaper he saw significant potential to lowermanufacturing costs by sourcing some parts together with Peugeotand Citroen rather than with parent GM.

"GM has global requirements for parts and components thatare unusual in the industry. A starter is tested at 40 degreesbelow zero, just as would be needed in Alaska, otherwise itfails the test -- the supplier can only meet these if he usesexpensive materials," he said in comments published on Friday.

"As part of the GM group, Opel is oriented much too often onfar too stringent standards required under U.S. legislation.Figuratively speaking you need a belt in addition to suspenders-- in Europe one is sufficient," he said.

(Reporting By Christiaan Hetzner. Editing by Jane Merriman)

((christiaan.hetzner@thomsonreuters.com)(+49 - 69 - 75651249)(Reuters Messaging:christiaan.hetzner.thomsonreuters.com@reuters.net))

Keywords: OPEL GM/