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PSA reportedly is stopping production of Peugeot and Citroën small city cars, withdrawing from an increasingly unprofitable market as its starts a strategic review ahead of its planned merger with Fiat Chrysler, three sources told the Reuters news agency.

Though PSA had already agreed to sell its stake in its Czech joint venture where the Peugeot 108 and Citroen C1 are made, the Reuters sources said the decision to stop selling the petrol cars altogether had just been taken, the sources said.

"PSA is getting out of both the factory and the A segment business, as it is offered today, and on which manufacturers have arguably lost the most money in Europe," one of the sources familiar with the matter told Reuters.

PSA declined to comment to the news agency on the future of the two small cars. It said it was reviewing which products would best meet customer expectations in the A segment and cope with European carbon emissions targets.

"This means a reflection with fresh and disruptive ideas," a spokesman said.

Reuters noted the European Commission was planning to tighten emissions limits for cars under new proposals designed to cut the bloc's greenhouse gas output further by 2030.

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Two of its sources said PSA's merger project with FCA had also increased the options available as Fiat had no intention of abandoning its small, best selling Panda and 500 models. Both already have hybrid versions and the 500 is also available in full electric mode.

"Current projects could be replaced by new ones made possible by the merger with FCA," another Reuters source said. "The merger is turning all the cards around, especially when you consider that the A segment, from the very first 500 to the Panda, is inseparable from Fiat history".

FCA also declined to comment to the news agency.

Reuters noted the European market for frugal city cars had been shrinking for several years. Citing IHS Markit data, it said share fell to 7.4% last year from 10.9% in 2010 while slightly larger and more profitable B segment vehicles maintained share at 30%.

As part of a profitability drive, PSA had already axed two smaller Opel models – the Adam city car and the entry-level Karl – as part of an overhaul of the German brand.

Despite their miniature engines and light weight, which theoretically made them suitable for cities, automakers have struggled to make their smallest cars profitable, Reuters added.

Daimler recently switched its Smart line to all-electric to improve their emissions profile in Europe.

PSA also considered electrification as an option for its A segment cars but eventually abandoned the plan, fearing it would remain unprofitable, one of the Reuters sources said.

Several alternatives were being studied, including offering more low-cost electric cars in the style of the new Citroen AMI, which is assembled in Morocco, or B segment vehicles with a more accessible price, the Reuters source said.

Reuters said, earlier this year, FCA sent a letter to its suppliers telling them the company's next three B segment cars would be based on PSA's modular CMP platform and produced internally under licence.

PSA chief executive Carlos Tavares, who will head the merged company named Stellantis, had said repeatedly he saw no need to scrap any brands following the merger, the news agency's report noted.