French car maker PSA Peugeot Citroen says the government is offering it up to 7 billion euros in financial guarantees, as the ailing car maker announced a new slump in sales.

It said the state rescue for its car loan arm, Banque PSA Finance, will be for new bonds to boost liquidity.

It also announced progress in its alliance with General Motors.

The company said sales fell 3.9% in the third quarter to 12.93 billion euro from 13.45 billion euro in the same period last year.

Vehicle division sales were down 8.5%, hurt especially by weak European demand.

Peugeot Citroen is closing one factory this year and plans to lay off thousands of workers. The Socialist government is expected to demand a reduction in layoffs in exchange for the rescue.

Peugeot and General Motors said they will develop a joint programme that will make a small van for GM's Opel and Vauxhall brands and serve as the basis for a compact crossover vehicle for Peugeot.

They will also develop a new low-emission small car and work together on mid-size cars and small vans under both companies' brands.

The two companies signed a deal earlier this year that included GM taking a 7% stake in Peugeot. They said they would combine their purchasing and save 2 billion US dollars a year by 2017.