French carmaker PSA Peugeot Citroen is looking to save the company with a capital increase that would take away the founding family's control of the firm.

Peugeot is in talks with Chinese state-owned carmaker Dongfeng Motor to raise €3bn ($4.1bn, £2.5bn) through a capital infusion that would dilute the company's existing shareholders.

The French government would also take part in the capital increase via a share issue on the same terms and conditions as Dongfeng.

The move comes after the company reported a further decline in its global sales, hit by the deepest and longest recession in the European car industry in decades. Earlier, the company said its global vehicle deliveries fell 4.9% in 2013.

Peugeot, Europe's second-largest car maker by volume, said it would require further funding to remain competitive.

Dongfeng is Peugeot' existing partner in a Chinese joint venture, and the companies have been in discussions for months on a deeper relationship.

In addition to the Chinese partner and the French government, all shareholders would be given an opportunity to buy shares in the capital boost plan on the same conditions.

The company expects to announce a deal when it publishes annual results on 19 February.

On 20 January, Peugeot's shares closed down 11% at €10.21, as investors dumped shares on fears that the new deal involving a right issue could heavily dilute existing shareholders.

New Ownership Structure

The deal approved by the company's board was a blow to chairman Thierry Peugeot from the founding family.

He had been calling for an alternative deal replacing the French government's role with a bigger market issue, potentially allowing the family to retain its controlling stake in the company, a source with knowledge of the matter told Reuters.

The family currently controls the carmaker through a 25% stake representing 38% of voting rights.

The proposed deal would result in the family, the French government and Dongfeng holding equal stake in the company at about 14%, according to the source.

"Peugeot will become a three-headed monster with three distinct shareholders, all with very different objectives," Florent Couvreur, an analyst with CM CIC Securities, told the Wall Street Journal.

Some analysts warned the company's management would be tough under the new, split ownership structure. Meanwhile, some others welcomed the deal saying it would allow Peugeot to pursue crucial technology investment without hurting its debt profile.