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WRAPUP 2-Fiat undecided on cap hike, could alter GM option

(Adds source on Fiat/GM meeting in fifth paragraph, updates share price)

By Jane Barrett

MILAN, Feb 19 (Reuters) - Loss-mired industrial group Fiat on Wednesday said it had not made any decisions about a widely expected capital increase, and one of its top bankers said a key option to sell its auto unit could be changed.

Fiat shares have fallen as much as 10 percent this week, hitting an almost 20-year low of 7.04 euros on Wednesday, on speculation the industrial group will have to deeply discount stock to coax investors to hand over more money.

"Regarding the rumours about a capital increase of Fiat SpA, the company confirms that no decision has been taken about such operations or about the terms of the deal," Fiat said in a note.

A financial source told Reuters that Fiat's board would discuss a capital hike of about 2.5 billion euros on Feb. 28 as part of a plan to pump up to five billion euros into its ailing Fiat Auto unit, which is 20 percent-owned by General Motors Corp.

Fiat Chairman Paolo Fresco and Chief Executive Alessandro Barberis are set to meet top GM executives in the United States on Sunday, a financial source told Reuters late on Wednesday.

The Financial Times has reported new stock would be sold at a 30 percent to 35 percent discount to market prices. Fund managers and traders said hedge funds were going short on the stock, selling shares in the hope of buying them more cheaply in the future.

"Arbitrage trades are prevailing ahead of the capital increase which the media say could be discounted," said HSBC fund manager Marco Vailati. "Investors want to cut the stock's weighting in their portfolio and hedge funds are short-selling."

Fiat shares were down 0.06 percent at 7.10 euros in late trade in Milan. Market watchers said hedge traders should cover their positions fast as hard news on the capital increase would be awhile in coming.

"Fiat will first need to convince the market it really can turn around the car arm and that it really can raise these new funds," said an auto sector analyst who asked not to be named.

PUT COULD CHANGE

Part of the funds could come from GM, which could be forced to buy the 80 percent of Fiat Auto it does not already own from next year under a "put" option that ratings agencies and creditors see as key to the group's valuation and future.

Fiat has been discussing changing the agreement with GM for the last few weeks, possibly asking the world's No. 1 automaker to inject two billion euros into Fiat Auto in return for delaying or scrapping the put option. Fiat presented the alternatives to creditors on Saturday.

The head of creditor Intesa told reporters in Rome that the banks would be open to changing the put "if something better comes up" but warned negotiations would take some time.

"However, we are working on the basis of having the put option and it is important not to change that until we have a different proposal on the table," Corrado Passera, the CEO of Intesa, said, adding the banks and Fiat would likely meet at the end of next week.

Slow car sales dragged Fiat Auto to an operating loss of about 1.3 billion euros last year and forced the group into a three billion euro bank loan, thousands of job cuts and plans for 20 new car launches in the next years.

WHERE TO FIND MONEY

Market watchers pointed out Fiat was trying to attract new cash at the worst possible time, with bourses in the doldrums and the threat of war in Iraq gnawing at investor confidence.

The Agnelli family, which owns about a third of Fiat, has approved a 250 million capital increase at the family money box that sits at the top of Fiat's control chain but has denied it could sell its stake in retailer Rinascente to raise more cash.

About another four billion euros could come from selling Fiat's aviation arm, Fiat Avio, and insurer Toro. MCC, the investment banking unit of Fiat creditor Capitalia , is advising Fiat on the Toro sale, Passera said.

Capitalia has a strong interest in the deal because Toro is one of its largest shareholders, with a 6.6 percent stake.

French insurer Groupama, keen to grow in Italy's domestic dominated market, said on Wednesday it would look at Toro while Italy's RAS said it was not yet studying the file. Another potential buyer, Italy's Unipol ,said on Tuesday it was not interested in Toro at the moment.

Creditor banks, exerting influence at Fiat to protect their three billion-euro loan, reportedly want Toro to be sold for 2.0 billion to 2.5 billion euros in cash. But market sources say that is out of reach for rivals, whose pockets have been emptied by falling equity markets.

On Tuesday, an industrial source said the board of Italian defence group Finmeccanica had discussed making a joint bid for Fiat Avio with French state-controlled Snecma, whose chairman valued the comapny at 1.5 billion to 1.8 billion euros.

(Additional reporting by Mary Kelleher in Paris, Alberto Sisto in Rome and Svetlana Kovalyova in Milan)