MILAN (Reuters) - The Italian government is holding talks with China's Chery Auto as part of efforts to attract another major automaker to the country in addition to Stellantis ( STLA ) and increase national car production, two sources told Reuters.

Rome wants to raise Italy's national car production to 1.3 million vehicles a year from below 800,000 in 2023 and is already in discussion with Stellantis ( STLA ) - the country's sole major automaker - to increase the group's output to one million units annually by the end of this decade, a total it last hit in 2017.

Industry Minister Adolfo Urso has said Italy wants a second manufacturer to add around 300,000 vehicles to national output.

Should the talks succeed, Chery would be among the first Chinese automakers with a European manufacturing presence, intensifying competition with local legacy manufacturers, especially in the electric vehicle (EV) segment.

Urso said last month Italy held talks with Tesla and with three undisclosed Chinese carmakers, whose representatives visited Italy last year to assess potential investment opportunities.

One of the two sources said Chery was for now the option Rome was "betting on most".

A spokesperson for Italy's Industry Ministry declined to comment.

Chery Europe Managing Director Jochen Tueting told Reuters the Chinese automaker expects sales in Europe to be high enough to support a local assembly plant.

"We are exploring different possibilities across Europe to look for a potential setup of local manufacturing for the future," Tueting said.

"We're having discussions in several locations across Europe right now," he added, but said non-disclosure agreements prevented him commenting on specific locations.

The sources, one from industry and one from the government, declined to be identified because the talks are confidential.

The industry source said Chery was considering either refurbishing an existing plant or building a new one in Italy, but was also assessing other options in Europe, including a former Nissan plant in Barcelona.

The government source said that Great Wall Motor was also among the Chinese automakers which were in touch with Rome and visited Italy.

Great Wall Motor did not respond to a request for comment.

PRICE WARS AND HIGH TENSION

The automakers in touch with Italy have also included Chinese EV giant BYD.

But BYD, which at the end of last year overtook Tesla as the world's biggest EV company by sales, said in December it would build its first European plant in Hungary.

It has not said whether it has plans for a second facility in Europe.

Apart from the aggressive price war shaking the EV sector, trade tensions are running high between China and the European Union, which is investigating whether Chinese EV makers benefit from unfair government subsidies.

Establishing manufacturing capacity in Italy or Spain, where EV sales are low compared to other countries, would fit Chery's strategy of selling a mix of internal-combustion engine, hybrid and fully-electric cars, the industry source added.

The company is launching its Omoda and Jaecoo brands in all major European markets. By the end of 2025, Chery plans three SUV models for each brand with a mixture of fuel types to serve different parts of Europe. EV sales are higher in northern Europe than in southern markets.