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UPDATE 1-Germany, steering clear of diesel bans, plans city transport fund

* Minister proposes fund ahead of Aug. 2 diesel forum

* VW to offer to refit 4 million diesel cars - CEO

* Germany stays clear of announcing diesel cut-off dates (Adds detail and background on diesel proposals, cartel allegations and UK/French bans)

BERLIN, July 27 (Reuters) - Germany's transport minister announced plans on Thursday for a fund to help cities modernise their transport systems and reduce pollution, but said it was too soon to bury the internal combustion engine.

Speaking a day after Britain said it would ban the sale of new petrol and diesel cars from 2040, Alexander Dobrindt said the fund would provide hundreds of millions of euros and would help cities to optimise traffic flows.

However, he did not say when the fund would be set up, and added it was not productive at this stage to talk of "burying the combustion engine".

Germany is home to three of the world's biggest carmakers in Volkswagen, Daimler and BMW, which have invested heavily in diesel technology, and the government has said it is opposed to banning diesel vehicles.

After Volkswagen (VW) admitted almost two years ago to cheating emissions tests, the entire auto industry has come under scrutiny for the nitrogen oxide emissions produced by diesel cars, which are blamed for causing respiratory diseases.

Dobrindt was speaking ahead of an Aug. 2 "diesel summit" at which representatives of Chancellor Angela Merkel's government, regional governments and carmakers will discuss ways to tackle diesel pollution.

Car industry officials and politicians have already agreed to update the engine software of around 9 million cars as part of efforts to ward off diesel bans in major cities like Munich or Stuttgart, sources told Reuters last week.

VW plans to offer to refit a total of 4 million diesel cars at the Aug. 2 meeting, Chief Executive Matthias Mueller said on Thursday after talks with Environment Minister Barbara Hendricks at the company's Wolfsburg headquarters.

The 4-million tally includes about 2.5 million diesel cars VW has had to recall in Europe's largest auto market over its emissions scandal, about 850,000 Audi luxury models and another 600,000 vehicles equipped with engines designed to meet older Euro-5 emissions standards, a VW spokesman said.

In response to the shifts towards electric vehicles announced by Britain and France, Dobrindt said it was still possible that carbon-neutral synthetic fuels could be as good as battery technology.

"We still have technological decisions ahead of us," he said, adding that while electric cars might be the future, it was not yet clear when they would be ready for the mass market.

Besides diesel, German automakers' credibility has also been battered by news that European and German regulators are probing allegations of anti-competitive collusion. (Reporting By Thorsten Severin and Markus Wacket; Writing by Thomas Escritt and Andreas Cremer; Editing by Victoria Bryan and Mark Potter)