By Samuel Shen and Kazunori Takada
SHANGHAI (Reuters) - China's Dongfeng Motor Group Co Ltd <0489.HK> and PSA Peugeot Citroen (UG.PA) will sign a memorandum of understanding on a capital tie-up between the two carmakers on Tuesday, a Dongfeng source told Reuters.
The source said the non-binding agreement would involve Dongfeng and the French government each injecting 800 million euros ($1.10 billion) for 14 percent stakes in the French carmaker.
The fundraising by PSA would total 3 billion euros after selling new shares to existing shareholders, said the source, who declined to be identified because the information was not yet public.
The Peugeot family's 25 percent stake and 38 percent of voting rights would be diluted to parity with the government and Dongfeng, short of the one-third required to veto decisions. The deal would end the Peugeot clan's control of the company it founded in 1810 as a maker of tools and coffee grinders.
Dongfeng spokesman Zhou Mi said an announcement related to the PSA deal would be made on Wednesday.
Sources told Reuters on Monday that PSA Peugeot's founding family had given the go-ahead for the tie-up with China's second-biggest carmaker. The plan is due to be approved by Peugeot's board on Tuesday and announced the following day, sources have said.
Peugeot, among the worst casualties of Europe's six-year market slump, is being kept afloat by 7 billion euros in state guarantees to its sales financing arm that expire next year.
Sources have said Peugeot plans to sell new stock to Dongfeng and the French state priced at 7.50 euros, a 41 percent discount on Monday's 12.79 euro closing price, followed by a rights issue to existing shareholders.
Shares of Dongfeng were suspended on Tuesday pending an announcement, it said in a filing to the Hong Kong stock exchange. The shares closed down 1.6 percent at HK$10.96 on Monday.
($1 = 0.7298 euros)
(Editing by Paul Tait and Stephen Coates)