UPDATE 3-Peugeot gets government rescue as crisis deepens

Laurence Frost and Gilles Guillaume

* Peugeot gets state guarantee, close to bank deal

* Shares fall to lowest since 1986

* EU vows 'careful assessment' of aid

PARIS, Oct 24 (Reuters) - PSA Peugeot Citroen unveiled a government-backed refinancing deal for its lending arm as the struggling French automaker's financial position deteriorated further, sending its stock to historic lows.

Europe's second-biggest automaker said it was close to an agreement with creditor banks on 11.5 billion euros ($14.9 billion) of refinancing and had won state guarantees on 7 billion euros in further borrowing by its Banque PSA Finance.

In return, the automaker agreed to appoint government and union board representatives, halt dividend payments and scrap stock-option awards to executives.

With its costly domestic production and high exposure to southern European markets, Peugeot is bearing the brunt of the region's slump as unemployment and government austerity weigh on consumer spending.

The downturn is hurting other mid-market automakers including Ford Motor Co, which announced the closure of a major assembly plant in Genk, Belgium, as Peugeot was detailing its bailout in Paris.

``Banque PSA is now government-backed,'' London-based Credit Suisse analyst David Arnold said. ``It's becoming increasingly obvious that selling assets won't stem the cash outflow.''

Peugeot shares were down 4.7 percent at 5.55 euros at 1210 GMT after touching their lowest levels since 1986. The stock has plunged 45 percent this year, contrasting with a 20 percent gain by the Stoxx Europe 600 autos & parts index.

The company is scrapping more than 10,000 jobs and a domestic plant to stem losses approaching 200 million euros a month, while developing future vehicles with General Motors to deliver more savings in five years' time.

But its restructuring efforts have proven to be too little, too late to counter the effects of Europe's brutal market contraction.

Reporting a 3.9 percent decline in third-quarter sales, Peugeot warned that net debt would rise to 3 billion euros by year-end from 2.4 billion on June 30, as an asset sell-off fails to keep pace with losses.

The debt outlook also reflects dimmer prospects for 57.4 percent-owned parts business Faurecia, which cut its full year earnings forecast on Monday.

``The competitive environment is getting tougher,'' Peugeot said.

Sales fell to 12.93 billion euros in the three months ended Sept. 30 as revenue from the core carmaking division dropped 8.5 percent to 8.52 billion euros.

The automaker cut its full-year European outlook to predict a 9 percent market decline, worse than the 8 percent contraction forecast last month.

Talks with alliance partner General Motors have settled on four joint vehicle programmes, Peugeot also said on Wednesday, outlining plans to pool development of two small cars, a compact crossover and a larger vehicle.

Peugeot turned to the French government after a Moody's credit rating downgrade earlier this month threatened to relegate the lending division to junk status, hobbling the sales financing business.

European Union objections to the three-year refinancing ``can't be ruled out'', Chief Executive Philippe Varin acknowledged, while his finance chief insisted that the plan broke no rules.

``It's not state aid, it's state support,'' Chief Financial Officer Jean-Baptiste de Chatillon said, adding that Peugeot would pay for the state guarantee. ``It's priced at market values.''

The German state of Lower Saxony, a major shareholder in European market-leader Volkswagen, has said it will oppose the package as a possible breach of EU rules.

``The problem that I see is less with the amount of money involved, more with how the competition authorities in Brussels will react,'' said economist Dominique Barbet of BNP Paribas - one of Peugeot's creditor banks.

France has not yet notified Brussels about the aid, European Competition Commissioner Joaquin Almunia said on Wednesday.

``Once we receive the information, we will have to (conduct) a very careful assessment of what's going on,'' he said.

Besides the board appointments, French Prime Minister Jean-Marc Ayrault said Peugeot was expected to trim its job cuts in return for the aid.

``The government has no intention of handing out gifts like this without return commitments,'' he said on France Inter radio.

In a separate statement, Peugeot also said it would refrain from proposing dividends, buying back shares or issuing stock options to executives while its debt carries state guarantees.