PARIS/TOKYO - Japanese carmaker Mitsubishi Motors Corp said talks to deepen ties with PSA Peugeot Citroen were ongoing, but played down expectations of a capital alliance after a report that those talks had stalled.

French daily Les Echos reported in its Tuesday edition that French carmaker PSA's chief executive Philippe Varin was preparing investors for a possible failure of the talks because the partners could not agree on a price.

We continue to hold wide-ranging talks over an expanded partnership, Mitsubishi Motors President Osamu Masuko told reporters in Saitama, near Tokyo, where the carmaker handed over 10 of its i-MiEV electric cars to the city on Tuesday.

As a result of that, a capital alliance is possible, Masuko said, but added it was not central to the discussions.

Last month, the two groups announced the start of talks to form a strategic partnership to build on their existing project-based ties such as SUVs and electric cars, with Mitsubishi saying a capital alliance could be part of that.

The Nikkei business daily said at the time that PSA could take a 30-50 percent stake in Mitsubishi Motors for up to 300 billion yen ($3.3 billion).

Failure to clinch an equity tie-up would be a blow to Mitsubishi Motors, which is Japan's weakest automaker and is said by analysts to need a strategic partner to survive in an increasingly competitive industry.

Peugeot is Europe's second-biggest carmaker behind Volkswagen. It faces pressure from domestic rival Renault, which is looking to boost its synergies with partner Nissan Motor Co.

On Monday, Peugeot launched a new car model, the 408, in China as it aims to boost sales there.

STALLED ON PRICE?

Les Echos said price was the sticking point in the broader negotiations to deepen the Mitsubishi/Peugeot alliance, without saying where it obtained the information.

Mitsubishi has a better market valuation than its French counterpart, and the Peugeot family, which owns 30 percent of PSA Peugeot Citroen, does not want to overpay for its share in the Japanese firm or lose control of PSA with an unfavorable share exchange, the paper said.

I don't decide the share price -- the market does, Masuko said, calling the newspaper report rubbish.

Shares in Mitsubishi Motors fell 2.3 percent to a near-3-week low of 130 yen, underperforming the broader market .N225.

Peugeot slipped 1.17 percent to 24.0650 euros in line with Dow Jones Stoxx Auto index .SXAP.

It sounds like Peugeot doesn't want to overpay for a stake in Mitsubishi, nor lose control of the company through an unfavorable share swap. We think the market will be disappointed if talks broke off, a Paris-based trader said.

PSA has a market value of $8.064 billion and Mitsubishi's is $8.183 billion.

Contacted by Reuters, a PSA spokesman declined to comment on the Les Echos article, saying only: Negotiations are ongoing for a strategic partnership. That remains the case.

Masuko said no announcement was imminent on the discussions with PSA, dampening some speculation it could be made with Mitsubishi Motors' third-quarter results on February 3.

($1=90.43 Yen)

(Reporting by Helen Massy-Beresford, James Regan and Blaise Robinson in PARIS, Chang-Ran Kim and Yoshifumi Takemoto in TOKYO; Editing by Tim Dobbyn, Edwina Gibbs, Ian Geoghegan, Marcel Michelson)

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