* Loss-making Fnac long seen as tough sale
* Government concerned about possible job losses
* PPR shares rise as much as 3 pct
(Adds details, quote from union)
By Pascale Denis and Astrid Wendlandt
PARIS, Oct 8 (Reuters) - France's PPR plans tosell its declining Fnac music and book retailer, a sourcefamiliar with the matter said, to focus on its more profitableluxury and sports brands such as Gucci and Puma.
The board is due to meet on Tuesday to discuss splitting offFnac, which analysts estimate could be worth up to 800 millioneuros ($1 billion), the source told Reuters on Monday. It willthen present the plan to employees, the source said.
PPR, the world's third-largest luxury group behind LVMH
and Switzerland's Richemont , has been tryingto sell its various retail businesses for several years toconcentrate on its luxury and sports brands which have strongergrowth prospects.
Analysts and bankers have said getting rid of Fnac would beparticularly difficult as the unit's sales and profits have beendwindling steadily, hit by music piracy and fierce competitionfrom the Internet.
PPR would also face resistance to any job losses at Fnacfrom the government, which is trying to fight risingunemployment and putting pressure on companies to safeguardjobs.
Labour minister Michel Sapin said on Monday he was closelywatching PPR's decision to cut ties with Fnac and its impact onjobs.
Fnac, which has outlets in Brazil, Italy, Spain, Switzerlandand 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'sannual general meeting in the spring.
PPR could put Fnac's assets into a new legal entity whichcould either be sold to a third party - which analysts say wouldlikely be a private equity firm - or listed on the stock market,the source said.
If Fnac applied for a separate Paris listing, PPRshareholders which include the Pinault family holding Artemiswith 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 theretail giant free to revamp its poorly performing Frenchbusiness.
"Fnac has a good chance of attracting private equity orindustrial bids," a Paris-based trader said, citing a price ofaround 550 million euros.
Getting out of general retailing has been a long and painfulprocess for PPR, whose initials stand for Pinault-Printemps-LaRedoute, which began in 2006 with the sale of the Printempsdepartment store.
Fnac, in which PPR started investing in 1994 and fully ownedin 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 itis no longer consolidated in PPR's accounts," said CatherineGaigne from the Sud union, which represents Fnac employees.
Analysts at CM-CIC Securities put a value of 775 millioneuros on Fnac, or 6.1 euros a share, saying a spin-off was asuitable 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 was 2.5percent higher at 1350 GMT, the only gainer on a 1.2 percentweaker French blue-chip CAC 40 index .
PPR declined to comment.
The company, which owns fashion brands Yves Saint Laurent,Balenciaga, Bottega Venetta, Stella McCartney and AlexanderMcQueen, sold furniture retailer Conforama last year.
In July it raised 968 million euros by selling its remainingstake in distribution unit CFAO to Japan's Toyota TsushoCorporation (TTC).
Last week, PPR Chief Executive Francois-Henri Pinault saidhe would update investors on plans to sell its Redcats unit -which owns mail order businesses La Redoute, Cyrillus andVertbaudet - before Oct. 25.
Fnac, which also sells toys and home electronics, made anEBIT loss of 7.5 million euros in the half year to June 30 whilePPR's luxury divisions made a profit of 727.1 million euros.
($1 = 0.7657 euros)
(Additional reporting by Christian Plumb and Blaise Robinson;Editing by Erica Billingham)
Keywords: PPR FNAC/