HELSINKI (Reuters) -Chinese battery maker Contemporary Amperex Technology (CATL) is selling its 20.6% stake in subcontract Finnish car maker Valmet Automotive to the Finnish state and another shareholder, Finland's government said on Monday, amid low electric car sales in Europe.

The Finnish state, which already owns 44.96% of Valmet Automotive through its investment company Finnish Industry Investment Ltd, did not say how much CATL was selling its stake for but said the government would also inject an additional 35 million euros ($40.97 million) of new capital into the car factory.

Valmet Automotive has previously made some cars for Porsche, Saab, Mercedes-Benz among other carmakers.

The Finnish government, in a statement, said the stake sale came amid "a challenging market situation" due to the "slower-than-predicted pace of electrification".

"The downturn in the European automobile industry has caused Valmet Automotive's order volumes to decrease in recent years," it said. CATL bought into Valmet Automotive in 2017.

Chinese electric vehicle (EV) makers, often backed by generous state support, have for years challenged traditional European and U.S. carmakers with cheaper, tech-savvy models.

After the CATL stake sale and the capital injection, the Finnish state will own a 79% stake in Valmet Automotive, while private investor group Pontos, an existing shareholder, will own 21%, the government said in a statement.

"In line with its strategy, Valmet Automotive is expanding its operations to new industrial sectors such as contract manufacturing for the defence industry," the government said.

While the European Union imposed tariffs on China-made EVs in 2024, industry lobbyists have urged the EU and national governments to bolster domestic players - especially as the sector grapples with a slowdown - to help even the playing field.

Under the arrangement announced on Monday, the state, Pontos and pension insurer Varma are also purchasing Valmet Automotive's shares in its subsidiary, battery maker Ioncor, giving the state a 70% stake in Ioncor through its investment company Finnish Minerals Group.

Ioncor, which employs around 1,000 people at its two battery plants in Finland and one in Germany, will seek to expand its operations to heavy-duty vehicles and machinery, Ioncor said in a separate statement.

In total, 120 million euros of state capital will be used for the financing arrangements, the government said.

($1 = 0.8542 euros)