By Agencies

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French automaker PSA Peugeot Citroen has announced to slash 8,000 jobs and close a major plant outside Paris as it struggles with mounting losses, in a move that could spark more restructuring and political tension in austerity-strapped Europe.

The Aulnay plant near Paris, which employs more than 3,000 workers, will stop making cars in 2014 as Peugeot reorganises its under-used domestic production capacity, the company said on Thursday.

Aulnay, which builds the Citroen C3 subcompact, will become the first French car plant to close in more than two decades, challenging new Socialist President Francois Hollande's pledge to revive industrial production.

"I know how serious these measures are for the people concerned, and for our entire company," Chief Executive Philippe Varin told reporters. "But a company can't preserve jobs when it is burning 200 million euros ($245m) a month in cash."

"Prevaricating would have put the group in great danger," Varin said.

Jean-Marc Ayrault, the French prime minister, said the government was studying the closure plan, which he called a "great shock", but stopped short of condemning it, which incurred the wrath of the CGT, France's biggest industrial union.

Peugeot said another plant in the western city of Rennes will shed 1,400 workers as it shrinks in step with demand for larger cars such as the Peugeot 508 and Citroen C5.

Some 3,600 non-assembly jobs will also be scrapped across the country.

Unions decry decision

Combined with France's share of 6,000 European job cuts announced last year, the latest measures will reduce Peugeot's 100,000-strong domestic workforce by close to 10 per cent, excluding subcontractors and service providers.

Workers at Aulnay downed tools after the announcement, halting production. Hundreds gathered under protest banners at the main entrance to the plant, the biggest industrial employer in the depressed, multiethnic Seine-Saint Denis district northeast of Paris.

"Varin has declared war on us, and we'll give him war," said local CGT union leader Jean-Pierre Mercier.

After initially rising, shares in family-controlled Peugeot were down 1.3 per cent earlier on Thursday.

The stock has plunged 32 per cent since January 1, wiping 1.2 billion euros off the company's market value.

General Motors bought a seven per cent Peugeot stake in March to underpin the companies' planned alliance in purchasing, logistics, vehicle development and production.

Seeking to disarm the critics, Varin disclosed that a 700 million-euro ($857.5m) loss at the core manufacturing division had dragged the group into the red. Operating cash flow is not expected to turn positive before 2015, he also said.

'Lost the plot'

"People weren't expecting them to consume cash at such an alarming rate for such a long time," said Erich Hauser, a London-based auto analyst with Credit Suisse.

"This is a company that has run out of options," Hauser said. "Peugeot has lost the plot in European small cars, which were its traditional mainstay."

Peugeot's global sales fell 13 per cent to 1.62 million light vehicles in the first six months - contrasting with a more modest 3.3 per cent decline reported by Renault and a 10 per cent gain for the Volkswagen brand.
 
Peugeot is one of the automakers most exposed to southern European markets badly hit by the region's debt crisis and lacks its German rival's export success or the support of a low-cost brand like Renault's Dacia.

Still, the French automaker's plans could prompt restructuring moves by rivals, analysts say, as the European industry battles overcapacity estimated at 20 per cent.

Renault and Fiat are also reducing headcount, while GM's Opel division plans to close its Bochum plant in Germany by 2017.