EU antitrust regulators are investigating whether Spain's plan to offer a 25.2 million euros ($32.71 million) grant to Ford Motor Co's plant will give the U.S. carmaker an unfair advantage.
Ford is overhauling its European operations by cutting jobs and closing plants in Belgium and two British locations, as the economic downturn dampens consumer appetite for new cars and trucks.
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The company, which holds about 8 percent of the European market, expects to lose $2 billion in Europe this year. The sector in general is struggling with over-capacity.
Ford plans to produce a new model of Ford Transit Connect in Valencia in the east of Spain, with the cost of the project estimated at 419.9 million euros. Spain informed the European Commission of its grant last year.
The European Commission said on Wednesday that a preliminary investigation showed that the project might exceed the authorized 5 percent increase in production capacity in a declining market.
"At this stage, the Commission has doubts that the data provided by Spain is appropriate to determine whether the market concerned is in decline," it said in a statement.
EU state aid rules allow EU governments to fund projects on condition certain market share and capacity increase thresholds are not exceeded.
Spain won EU approval for about 214 million euros in regional aid for Ford's Spanish subsidiary since 2007.
"We firmly believe that our state aid request for the Ford Transit Connect is line with EU law. We will work with the Spanish government and the EU Commission to clarify the situation," said Ford's spokesman Adrian Schmitz.
($1 = 0.7705 euros)
(Reporting by Foo Yun Chee and Christaan Hetzner in Frankfurt, editing by Robert-Jan Bartunek and Louise Heavens)