The German government will likely settle on a preferred bidder for Opel, the German unit of General Motors, by the middle of the week, Chancellor Angela Merkel's spokesman said on Monday.

GM and Berlin are in a race against time to finalize a sale of Opel. GM has the final word but government has a stake because it will likely provide billions of euros in financing guarantees.

Canadian car parts group Magna International emerged as the favorite to win Opel last week, but Italian carmaker Fiat has improved its offer since then. Belgian-listed holding group RHJ International is also in the running.

It is the government's goal to clarify the Opel question by the middle of this week, government spokesman Ulrich Wilhelm told a news conference.

The government's aim remains to keep all four Opel plants in Germany open and to prevent an insolvency. Wilhelm added that the that talks were continuing with all three suitors and the bids were still being improved.

There is further movement in their positions, he said. Wilhelm added that Merkel had spoken on the telephone at the weekend with Russia Prime Minister Vladimir Putin about Opel.

Wilhelm also said that while talks are continuing with all three bidders, discussions have been most intense with Fiat and Magna because their offers are the most complex.

Earlier on Monday, Juergen Ruettgers, CDU state premier of North Rhine-Westphalia where an Opel plant is based, said he also expected a suitor to be picked by mid-week and he was pleased Magna improved its offer to preserve jobs in Bochum.

I believe we'll have a decision by the middle of the week, Ruettgers told reporters. It's good that there is competition to win the bid. That gives me confidence that there will not be any need for an insolvency.

Economy Minister Karl Theodor zu Guttenberg said on Sunday the bids are inadequate and suggested an orderly insolvency might be the best way to rescue at least a part of Opel, which employs around 25,000 in Germany.

But Vice Chancellor Frank-Walter Steinmeier, running against Merkel under the SPD banner in the September election that has cast a shadow over the Opel rescue, rejected that option and criticized Guttenberg for all the loose talk about insolvency.

Roland Koch, CDU state premier of Hesse where Opel is headquartered, also distanced himself from Guttenberg's ideas about insolvency, telling reporters in Berlin after a meeting of key leaders to discuss the bids that this was the worst option.

You can never rule it (insolvency) out, but that would be the worst-possible scenario, Koch said.

Italy's Fiat improved its offer on Saturday after top German officials said that Magna, a Canadian car parts group, submitted a better plan than its rivals. Magna has also improved its bid, a source close to the negotiations told Reuters.

But Guttenberg said the bids were still unacceptable because the government would shoulder too much potential financial risk.

The U.S. government has given GM until June 1 to restructure its operations and prove it can be viable without state aid, or face probable bankruptcy.

Guttenberg's suggestion that a structured insolvency might be the best option also earned him criticism from Opel's works council head Klaus Franz.

It is incomprehensible and counterproductive to speak about insolvency when several parties were showing strong interest in Opel, Franz told Bild newspaper on Monday.

(Additional reporting by Kerstin Gehmlich, Noah Barkin and Sarah Marsh; Writing by Erik Kirschbaum; Editing by Hans Peters)

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