The family's 25 percent stake and 38 percent of voting rights would be diluted to parity with the government and Dongfeng, short of the one-third required to veto decisions.

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The proposed Dongfeng deal has divided the family, pitting Chairman Thierry Peugeot against cousin Robert, who heads FFP.

In a letter to Robert, leaked to French media, Thierry pushed an alternative plan to raise cash on the market and inject more family money. But he failed to win board support and abstained from votes to pursue the talks.

The logic behind the deal has been questioned by some analysts and investors who suggest Peugeot could instead sell its lending arm or Faurecia parts division.

"PSA would ultimately be better off if it walked away from a Chinese deal," Bernstein Research analyst Max Warburton said in a Feb 14 note.

The 3 billion euro capital increase would be accompanied by a warrants issue allowing current shareholders to buy additional stock worth up to a further 1 billion euros.

The deal, subject to shareholder approval, would see Peugeot and Dongfeng reinforce their existing joint venture and Chinese production, entering new Southeast Asian markets.

They also plan to co-develop technologies including the Peugeot's HybridAir transmissions, which save fuel by storing energy recovered from braking in a compressed gas cylinder.

The Peugeots' loss of control leaves just two European car dynasties at the wheel: the Quandts of BMW and the Agnellis, who clung to power at Fiat even as it absorbed larger US rival Chrysler last month.