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UPDATE 3-German ministers and carmakers meet to 'save diesel'

* Meeting to tackle pollution from diesel vehicles

* Carmakers likely to be spared costly hardware changes

* Threat of ban on diesel cars in some German cities (Updates with environment minister comments, car sales data)

BERLIN, Aug 2 (Reuters) - German ministers and car bosses held crisis talks on Wednesday, seeking to cut inner-city pollution to avert outright bans on diesel cars in a belated attempt to restore the tarnished reputation of the country's auto industry.

Since Volkswagen admitted to cheating U.S. diesel emissions tests in September 2015, Chancellor Angela Merkel's government has come under fire for not doing enough to crack down on vehicle pollution and for being too close to powerful carmakers.

The issue has become a central campaign topic ahead of national elections next month and the government is keen to show it is taking action as environmental groups go to the courts to try to force major cities to ban diesel vehicles.

But ministers are also wary of angering the drivers of 15 million diesel vehicles and damaging an industry that is the country's biggest exporter and provides about 800,000 jobs.

"We still need a strong auto industry. We want our carmakers to continue to be successful in the world and to carry on building the best cars," said Armin Laschet, the premier of North-Rhine Westphalia, home to about a third of Germany's automotive suppliers and Ford's European headquarters.

"We need to save diesel ... but there must also be a new push into the electric era," he added.

The stakes have increased for the German car industry in recent weeks. Britain and France have announced plans to eventually ban all diesel and petrol vehicles and Tesla has launched its first mass-market electric car.

Meanwhile, top German carmakers BMW, Daimler , Audi, Porsche and VW are being investigated by European regulators for alleged anti-competitive collusion.

An opinion poll published on Wednesday by Die Welt newspaper showed 73 percent of Germans want politicians to take a tougher line with the car industry on air pollution.

German car sales data on Wednesday showed diesel car sales fell 12.7 percent in July. Now diesel makes up only 40.5 percent of new car sales in Europe's largest car market, down from 46 percent at the end last year.

Activists from environmental group Greenpeace hung a banner across the facade of the German transport ministry on Wednesday proclaiming "Welcome to Fort NOX", a play on the abbreviation for the toxic nitrogen oxides (NOx) emitted by diesel vehicles.

"The diesel summit is defending worn-out diesel technology as if it was gold in Fort Knox," Greenpeace said in a tweet, referring to the U.S. military post where gold is stored.

Meanwhile, the summit had been moved to the interior ministry.

VEHICLE BANS

Industry and government sources said on Tuesday that carmakers would probably be spared making costly hardware changes to engines and would instead be required to carry out software updates to around 2 million vehicles.

Environment Minister Barbara Hendricks said software updates would just be a first step and the government would continue discussions with the car industry on further measures to cut emissions.

"The German car industry obviously hasn't got a good reputation at the moment, to put it mildly," she told SWR2 radio. "We must avert this image damage but we are just at the beginning of warding it off."

VW's emissions test cheating - which was exposed by U.S. regulators - led to a string of revelations that showed diesel vehicles from most manufacturers release far more NOx gases on the road than in laboratory tests used to assess their safety.

That has hit sales of diesel vehicles in Germany as buyers worry about potential driving restrictions, causing a big headache for carmakers that were betting on diesel technology to cut carbon dioxide (CO2) emissions to meet climate change rules.

Falling sales of diesel cars have led to an increase in CO2 emissions, Germany's KBA motor authority said on Wednesday. Average emissions per vehicle rose 0.4 percent in July to 128.4 grams of carbon dioxide per kilometre, it said.

Stephan Weil, premier of the Lower Saxony state that is home to VW, said he did not expect a quick fix.

"The car industry made serious mistakes, huge mistakes over many years," Weil told ZDF television. "We will not be able to clear up an aberration that developed over so many years within months or just a few days."

(Additional reporting by Madeline Chambers; Editing by Keith Weir and Mark Potter)