Poland will start talks to sell its 20% stake in ailing car maker FSO to Ukraine's AvtoZAZ, the government said on Tuesday, according to a Reuters report, thus clearing the way for AvtoZAZ to gain a foothold in the EU's largest new member.

Earlier AvtoZAZ had bought debt owed by FSO to two Polish banks for about $US10 million - presumably at a steep discount. It is in talks to buy liabilities from another four lenders, the report said.

"We will start talks with AvtoZAZ on the sale of our stake in FSO - they seem to be the natural partner after buying up the debt," treasury minister Jacek Socha told Reuters.

The news agency noted that Ukraine borders three of the Central European countries that joined the European Union this year and several of its companies have sought to set up beachheads inside the trading bloc by buying local companies.

This year FSO is set to produce 50,000 budget Lanos and Matiz models under licence from South Korea's Daewoo - just one-third of its current capacity and one quarter of its all-time record production of 200,000 in 1999, Reuters said.

"In practice AvtoZAZ is responsible for the continuing existence of FSO ... currently it takes 88% of production," Socha said.

FSO had been sold to South Korea's Daeewoo Motor but was left out of a deal under which General Motors took over the bankrupt Korean company's operations, Reuters noted.

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