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UPDATE 1-Fiat says agrees in principle on Fidis sale

(Adds background, detail, market reaction.)

By Gianluca Semeraro

MILAN, Dec 19 (Reuters) - Italian automaker Fiat said on Thursday it had agreed in principle to sell a majority stake in its consumer finance unit Fidis to its main creditor banks, a long-awaited deal that could slash its debt burden.

The sale is expected to cut Fiat's gross debt by about six billion euros and is crucial to its effort to convince rating agencies not to downgrade its debt to "junk" status.

A Fiat spokesman said the long-awaited deal had been reached with banks Capitalia , IntesaBCI , Sanpaolo IMI and UniCredito , adding that full details of the accord would be provided early in 2003.

At 1616 GMT, Fiat shares were up 0.4 percent, outperforming the DJ Stoxx index of European automobile stocks , which was down about one percent.

A financial source added that the accord would allow Fiat to deconsolidate debt in 2002, helping it meet goals set with the banks to improve its 2002 balance sheet.

Neither Fiat nor the source provided any details about the terms of the agreement, reached at the end of a second day of meetings with the banks.

Newspapers on Thursday reported a "technical agreement" on the sale which valued Fidis at 800 million euros ($825.5 million).

Fiat's top creditors threw the crisis-hit industrial group a three billion-euro lifeline in May and said they would take a majority stake in Fidis if no other buyer came forward.

Fiat has promised its banks to cut its gross debt to 23.6 billion euros by early 2003 from 32.8 billion at the end of September.

By the time Fiat finalises its 2002 accounts, net debt must be 3.6 billion euros, down from 5.8 billion in September.

Earlier this month, Fiat sold its Brazilian customer financing unit to Banco Itau for 256 million euros in a deal the struggling Italian icon said would knock 800 million euros off its gross debt and cut net debt by 100 million.