General Motors is leaning toward picking Canada's Magna International and its Russian partners -- Germany's favored suitors -- as preferred buyers for the Opel business in Europe, sources close to the matter said on Friday.

But the automotive group faced a stiff challenge from Brussels-based financial investor RHJ International as GM's board weighed rival offers for Opel, which started making cars in 1899 and which GM bought in 1929.

It's going in the direction of Magna, one source said.

The sale of Opel is being keenly watched as billions of euros in government aid is riding on the outcome as are the employment prospects of over 25,000 people in Germany and thousands more across a large swathe of Western Europe.

A Magna victory would be a coup for its founder and chairman, Frank Stronach, who left Europe a poor toolmaker half a century ago and built his company into one of the world's biggest automotive suppliers.

It would mark a setback for Leonhard Fischer, the suave former investment banker and turnaround specialist who runs RHJ.

Officials in Berlin say talks with GM executives have gone well in recent weeks and that there is support for Magna's bid within the board. But they also say RHJ also has supporters in Detroit and describe the decision as open.

Sources said GM board talks were expected to begin around 1700 GMT (1:00 p.m. EDT).

German Economy Minister Karl-Theodor zu Guttenberg said on Thursday that he expected the GM meeting to yield a decision on a preferred bidder but other government officials in Germany have said a decision could still be pushed back.

POLITICAL HOT POTATO

In Germany Opel employs over 25,000 people in four major plants making everything from 3-door Corsa subcompacts to Zafira vans. In the U.K. there are two key factories which produce automobiles under the Vauxhall badge, while Opel also has other facilities in Belgium, Poland and Spain.

Opel and its sister brand Vauxhall sold just over 560,000 cars in Europe in the first half of the year for a market share of 7.6 percent, according to data compiled by the ACEA auto industry association.

Opel's Astra compact competes with the Volkswagen Golf in the mass market. Its other best sellers include the small Corsa model and the mid-sized Insignia, which was voted European Car of the Year by automotive journalists.

Berlin and the German states that host Opel plants have made clear they want Magna to get the carmaker and are set to provide 4.5 billion euros ($6.4 billion) in state aid to make it happen.

Trustees overseeing a majority stake in Opel -- which Germany ring-fenced and propped up with state aid to avoid having it swept into GM's brief bankruptcy -- have to approve any deal.

Talks to sell Opel have lasted for months and have become a political hot potato ahead of German elections in September because of the state support involved and the thousands of job cuts expected to follow any sale.

German Chancellor Angela Merkel and German states think the Canadian automotive group's expertise can save more of the 25,000 Opel jobs in Germany.

Magna's co-CEO Siegfried Wolf said last week the Canadian company and its Russian partner Sberbank had reached an agreement in principle with GM over a contract to buy 55 percent of Opel, raising hopes of a deal.

But GM's top negotiator for the Opel deal, John Smith, has repeatedly cited the positive aspects of RHJ's offer, which he says would be easier to implement than Magna's plan.

RHJ has presented an industrial concept as convincing as Magna's while requiring less state aid, he has said.

The field of bidders narrowed to two when Italian carmaker Fiat and China's Beijing Automotive (BAIC) dropped out.

GM, which emerged from bankruptcy protection on July 10, this week agreed to sell its Saab car business to a tiny Swedish luxury carmaker, the first in a series of big sales the U.S. group is planning as it slims down.

(Reporting by Philipp Halstrick, Angelika Gruber, Gernot Heller and Maria Sheahan. Editing by Richard Hubbard)

($1=.7028 Euro)

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