MILAN - Fiat may offer to raise car production in Italy 50 percent when it holds preliminary talks with the government on Tuesday, in return for tax breaks on some car sales and possible help in reducing labour costs.

Fiat CEO Sergio Marchionne says Rome's target for over 900,000 cars to be produced in Italy is not astronomical -- but the company will make only around 600,000 vehicles domestically this year, down from about 800,000 before the global financial downturn began.

The meeting on Tuesday between Marchionne, Industry Minister Claudio Scajola and a representative from Prime Minister Silvio Berlusconi's office, is seen as the opening of discussions and no agreement is expected at this early stage.

The crisis has already brought General Motors and Chrysler to the brink and they are now supported by Washington. Western car makers are increasingly looking to consolidation or at least tighter cooperation, often with Asian partners, to survive.

Fiat itself took a 20 percent stake in Chrysler earlier this year in the Obama administration's rescue deal.

We are hoping for a strong commitment by Fiat, which is growing in the world, to also grow in Italy, Scajola said on the eve of the meeting.

Marchionne might shift some Fiat Panda production from an overstretched plant in Poland to help boost Italy output.

But with costs on his mind, he is likely to confirm plans to halt auto output at the company's expensive Termini Imerese plant by 2011.

There have been reports of interest in the plant, which is on the island of Sicily, from both India and China but industry observers say any foreign car maker would find the logistics as difficult as Fiat.

INCENTIVES TO CONTINUE

The Italian company, like other western car makers, was hit hard when credit for customers dried up. Governments in the west stepped in to support sales with tax breaks but many of these are ending and that could mean hefty falls in demand in 2010.

Rome's tax breaks run out on Dec. 31, but Scajola has promised these will be extended in some form beyond the deadline. Foreign car makers' association UNRAE says the government is focused on tax breaks for natural gas powered cars, mostly sold by Fiat.

UNRAE says without any incentives, car sales in Italy could fall to 1.8 million units in 2010. Incentives on natural gas cars could add 80,000 sales to that figure.

Total car sales in Italy are expected to be about 2.1 million vehicles in 2009. In the first 11 months of 2009, Fiat brands had a 32.88 percent share of the domestic market followed by Ford with 9.80 percent.

Marchionne's other big concern is production costs and he has called many times for rationalisation of output in Europe, as there has already been in the United States.

He thinks internationally after taking on Chrysler, one industry specialist said. Incentives are not the main concern, he said, adding the domestic auto industry had lost importance.

We have six sites in Italy which produced the equivalent of one factory in Brazil. What kind of industrial logic is that? Marchionne said last month.

The Pomigliano plant in southern Italy has been in production for about three months this year and there have been protests over a potential closure. Workers have been temporarily laid off under a government-supported scheme.

The industry specialist said it would make more industrial sense for Fiat to move its Polish production to the Mirafiori plant, near Turin, in Italy's richer north.

For the government, which faces regional elections in March, the industry is jobs and votes. For Marchionne it is jobs and costs. (Reporting by Jo Winterbottom; Editing by Mike Nesbit)

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