* New CEO pledges action on pricing, low-cost
* Dongfeng-Peugeot plans new models, Asia expansion
* Auto division loss narrows to 1.04 bln euros
* Peugeot shares close down 1.5 percent (Recasts, adds company and analyst comments, details, background)
By Laurence Frost
PARIS, Feb 19 (Reuters) - PSA Peugeot Citroen's new boss promised a back-to-basics turnaround as the troubled carmaker unveiled a French-backed rescue deal with China's Dongfeng on Wednesday, along with another multibillion-euro loss.
Incoming CEO Carlos Tavares said he saw "huge room for improvement" as Peugeot announced a 3 billion euro ($4.1 billion) fundraising that brings new leadership, more time to recover and an end to two centuries of family control.
Dongfeng Motor Group and the French state will each pay 800 million euros for 14 percent of the carmaker to match the founding Peugeot family's reduced holding, Peugeot said, confirming earlier Reuters reports.
While the deal marks the end of an era, with Thierry Peugeot stepping down as the dynasty's last chairman, it may also clear the decks for a deep review of the group's business practices and corporate culture.
"It's a return to fundamentals," Tavares said from a podium shared with outgoing CEO Philippe Varin.
"Our challenge is to be the best of the Europeans in terms of (our) manufacturing and distribution model, which frankly is not the case today," he told analysts and reporters.
Peugeot will source parts more competitively, accelerate the development of Citroen's premium DS line into a standalone brand and drop some of the group's current 60 models to cut costs and improve pricing, he said.
The former No.2 to Renault boss Carlos Ghosn also promised measures to tame Peugeot's losses in Latin America and Russia, to be unveiled with a new mid-term plan in April.
While at Renault, Tavares was credited with narrowing the pricing gap with European market leader Volkswagen.
"He comes with a very good track record and seems already to have identified clear areas of improvement by benchmarking Peugeot against Renault-Nissan," said Stuart Pearson, a London-based analyst with Exane BNP Paribas.
Peugeot is currently being kept afloat by a 7 billion euro state guarantee to its car loans arm, but that expires next year. Along with the Dongfeng deal, the company announced plans for a lending venture with Banco Santander in the region.
It also posted a 2.32 billion euro ($3.2 billion) net loss and warned on Wednesday it may not stem the red ink until 2016, a year later than initially promised.
Peugeot shares closed down 1.5 percent at 12.31 euros, after coming off gains of more than 9 percent earlier in the day.
NEW LEASE OF LIFE
Under family control, insiders say Peugeot has been slow to adapt to competitive threats, missing opportunities to deepen partnerships with BMW, Fiat, Toyota and Mitsubishi Motors.
The firm will now use its new capital to catch up in hybrids, low-cost cars and Mediterranean markets where it lags behind the likes of Renault-Nissan and Toyota, Chief Financial Officer Jean-Baptiste de Chatillon said.
"Everything is in place to give Peugeot a new lease of life as a major international carmaker," Chatillon said. "We have the products, the teams, the know-how, and now we have a new balanced and stable ownership."
Under their framework deal, Peugeot and Dongfeng pledged to expand their existing joint venture with new models and a sales target of 1.5 million vehicles for 2020, generating 400 million euros of savings for the French partner.
The alliance will also create a major new research and development centre in China and a sales venture to export their cars to other Southeast Asian markets, the companies said.
Peugeot will raise 1.05 billion euros in an initial share sale to Dongfeng and the French state at 7.50 euros - a 40 percent discount to the market price. Both will then subscribe to a rights issue backed by banks to raise another 1.95 billion euros, including 150-250 million from the Peugeot family.
Current shareholders will receive warrants allowing them to buy additional stock, raising up to 770 million euros more.
As a result, Dongfeng, France and the Peugeot family will each have two board seats, according to a summary of their shareholder agreement published by the Chinese carmaker. The Peugeot board is "expected to be chaired by an independent member", it said.
But in an early sign of potential governance headaches inherent in Peugeot's new "three-headed" ownership, France made clear there was no consensus on the chair nomination as it pushes senior civil servant Louis Gallois as its own candidate.
"There will be a discussion between the shareholders," Industry Minister Arnaud Montebourg said, adding it was "too early to say" whether the chairman would be independent.
Ministers have also been quick to rule out any factory closures, further to last year's scrapping of Peugeot's Aulnay plant near Paris. But the carmaker confirmed plans on Wednesday to reduce its Poissy and Mulhouse sites to one production line each as it trims excess capacity.
Tavares, whose appointment was announced in December but takes over the operational leadership only this week, will have to tread a fine line between boardroom politics and business priorities.
Peugeot on Wednesday said it may not return to positive cash flow until 2016, a year later than initially promised in a recovery plan unveiled two years ago, but earnings also showed signs that the company may soon bottom out.
The firm's operations ran through 426 million euros in cash before restructuring, beating its goal of cutting the previous year's 3 billion cash burn by half.
Its net loss was cut by more than half from the 5-billion-euro loss recorded in 2012 after heavy writedowns, with the core auto division's operating loss narrowing 30 percent to 1.04 billion euros.
That was, however, offset by currency effects and rising costs on its debt load, which increased by about 1 billion euros to 4.15 billion.
Peugeot said it had 6.6 billion in cash reserves as of Dec. 31 and had renewed a 2.7 billion euro credit line with nine banks for up to five years.
The Santander venture will replace Peugeot's French state guarantees and lead to the deconsolidation of its lending division, whose 368 million euro profit narrowed the group operating loss to 177 million last year, the company said. ($1 = 0.7272 euros) (Additional reporting by Gilles Guillaume and Yann Le Guernigou; Editing by James Regan, Mark Potter and Julien Toyer)