* Buyout funds, India's Bajaj Auto also seen preparing bids
* Harley-Davidson hires Goldman Sachs for deal - source
* Volkswagen's labour unions oppose Ducati sale (Adds criticism from VW works council)
LONDON, June 21 (Reuters) - U.S. motorcycle maker Harley-Davidson is lining up a takeover bid for Italian rival Ducati, potentially bringing together two of the most famous names in motorcycling in a deal that could be worth up to 1.5 billion euros ($1.67 billion), sources told Reuters.
Indian motorcycle maker Bajaj Auto and several buyout funds are also preparing bids for Ducati, which is being put up for sale by German carmaker Volkswagen.
A deal with Harley-Davidson would bring together the maker of touring bikes like the Electra Glide that are symbolic of America with a leading European maker whose high-performance bikes have a distinguished racing heritage.
Milwaukee-based Harley-Davidson has hired Goldman Sachs to work on the deal, one source familiar with the matter said, adding tentative bids were expected in July.
Volkswagen, whose Audi division controls Ducati maker of the iconic Monster motorbike is working with investment boutique Evercore on the sale which will help it fund a strategic overhaul following its emissions scandal.
Based in the northern Italian city of Bologna, Ducati was on the wish list of private equity funds KKR, Bain Capital and Permira, which are all working on the deal, said the sources who declined to be identified as the process is private.
Ducati was launched in 1926 as a maker of vacuum tubes and radio components and its Bologna factory remained open in World War Two despite being the target of several bombings.
Ducati racers have won the Superbike world championship 14 times, with Carl Fogarty and Troy Bayliss its most successful riders.
Harley-Davidson, which commands about half the U.S. big-bike market, was founded in Milwaukee, Wisconsin at the start of the last century and was one of two major American motorcycle manufacturers to survive the great depression.
Demand for Harley's motorcycles continues to be slow as its loyal baby boomer demographic ages and rivals such as the Indian brand bike maker Polaris Industries Inc and Japan's Honda Motor Co Ltd offer discounts.
Volkswagen's powerful labour unions, which control half the seats on the carmaker's 20-strong supervisory board, repeated their opposition to selling the Italian motorcycle maker.
"Ducati is a jewel, the sale of which is not supported by the labour representatives on Volkswagen's supervisory board," a spokesman for VW group's works council said in an email.
"Harley-Davidson is miles behind Ducati in technology terms," he added.
Evercore has sent out information packages to a number of potential suitors including Ducati's previous owner Investindustrial, sources with knowledge of the matter said.
Investindustrial bought a stake in Ducati before the financial crisis, subsequently taking control of the business before selling it to Audi in 2012.
It is now looking to compete with heavyweight private equity firms and large industry players to regain control.
Volkswagen, Audi, Harley-Davidson, KKR and Bain Capital declined to comment. Bajaj, Investindustrial and Permira were not immediately available.
Volkswagen, Europe's largest carmaker, is seeking to move beyond an emissions-cheating scandal that has tarnished its image and left it facing billions of euros in fines and settlements.
A successful deal for Ducati, which last year reported revenues of 593 million euros, would show Volkswagen boss Matthias Mueller is serious about reversing his predecessor's quest for size.
Volkswagen said last June it would review its portfolio of assets and brands, rekindling speculation among analysts that "non-core" businesses could be put up for sale.
Volkswagen hopes to raise between 1.4 billion and 1.5 billion euros from the sale of Ducati, valuing it at 14-15 times its earnings before interest, taxes, depreciation and amortisation (EBITDA) of about 100 million euros, the sources said.
The German car maker wants a valuation that reflects trading multiples of similar trophy assets in the automotive industry, such as Italian car maker Ferrari which trades at almost 30 times its forward earnings.
Yet it may need to compromise on price as some of the bidders would struggle to pay as much as 1.5 billion euros for Ducati, several sources said.
Price expectations have already proved challenging for some industry players who recently decided against bidding.
Indian motorcycle firm Hero MotoCorp and its rival TVS Motor Company initially expressed interest in Ducati but were put off by its price tag and decided to walk away, the sources said.
German car marker BMW and Japanese motorcycle makers Honda and Suzuki have also decided against bidding for Ducati, sources close to the companies told Reuters.
A BMW spokesman confirmed the German firm was not interested in Ducati, while Hero and TVS were not immediately available for comment.
Another source close to Volkswagen said the sale of Ducati might not be finalised before the annual EICMA motorcycle show in Milan in mid-November as Volkswagen wanted to find the right buyer and the sales process might take time.
($1 = 0.8978 euros) (Additional reporting by Arno Schuetze in Frankfurt, Andreas Cremer in Berlin, Naomi Tajitsu in Tokyo, Aditi Shah in New Delhi and Kane Wu in Hong Kong; Editing by Adrian Croft and Edmund Blair)