* GM has said without Friday deal, unit likely to seek bankruptcy protection
* GM wants wage concessions from labour union, govt funding
* Most thorny issue is job security for nearly 700 workers -union (Adds comments from union, GM Korea CEO)
SEOUL, April 20 (Reuters) - General Motors' South Korean unit and its labour union failed to reach a wage deal by Friday, breaching a deadline set by the U.S. automaker to seek bankruptcy protection for the loss-making unit.
A source familiar with the matter said GM Korea will hold a board meeting at around 8 p.m. local time on Friday to discuss filing for a court-led rehabilitation.
But a union official told Reuters in a text message that the two sides will continue talking until Monday afternoon.
The U.S. automaker shocked South Korea when it unveiled in February a major restructuring plan for its unit that involved closure of one of its four plants in the country and voluntary redundancies of 2,600 workers.
It has sought wage concessions from the union as well as government funding and incentives to save the remaining three factories.
GM has said the unit, which employs some 16,000 people, is likely to file for bankruptcy if there was no restructuring agreement by Friday.
"Without concessions from the labour union and clear resolution from stakeholders, the company has no choice but to go ahead with rehabilitation proceedings," GM Korea CEO Kaher Kazem said after the talks failed in a letter to employees that was seen by Reuters.
GM Korea, however, is not expected to immediately file for court receivership, as any plan needs to be put to a vote at a shareholder's meeting. It will also need approval from 85 percent of its shareholders.
That includes the state-funded Korea Development Bank (KDB). The bank told Reuters this week that it may sign a preliminary agreement by April 27 to financially support the business should an interim due-diligence report due on Friday turn out to be satisfactory.
The U.S. automaker owns 77 percent of GM Korea while KDB owns a 17 percent stake. GM's main Chinese partner, SAIC Motor Corp, controls the remaining 6.0 percent.
A KDB spokesman declined to comment.
A union official previously said the thorniest issue is job security for 680 workers at the Gunsan factory that is due to be closed by May.
"We don't want a disaster. We still have to keep in mind the worst situation," he said prior to the talks, declining to be identified due to the sensitive nature of the talks.
GM Korea's future is important for South Korea as GM and its suppliers have hired a total of 156,000 workers. GM Korea also accounts for some 13 percent of the nation's automaker jobs and 16 percent of the sector's exports in Asia's fourth-biggest economy.
Its restructuring also poses a challenge to South Korean President Moon Jae-in, who has attached the utmost priority to jobs, especially with local elections scheduled for June.
Over the past three years GM has sought to focus on profitable markets, mainly the United States and China, and new technologies such as electric and automated vehicles.
Although the South Korean unit has been hobbled by labour costs and hurt by GM's decision to pull its Chevrolet brand from Europe, a key export market, any decision on whether to pull the plug on the unit will not come easy for GM Chief Executive Mary Barra.
The unit was once the backbone of its Asian strategy and still makes more than 1 million assembled or partially assembled vehicles catering to the U.S., Europe and emerging markets.
It is also an engineering and design source for GM's small vehicles and electric vehicles as well as home to some of GM's top-ranked suppliers globally. ($1= 1,060.8700 won) (Reporting by Hyunjoo Jin; Additinoal repoting by Ju-min Park; Editing by Edwina Gibbs and Muralikumar Anantharaman)