(Adds quotes, paragraphs 16-18)
* European Investment Bank funding for research
* Draft report says EU 2020 car, van CO2 standards feasible
* Status quo has to change, capacity has to be adapted
By Barbara Lewis and Francesco Guarascio
BRUSSELS, June 5 (Reuters) - Europe's industry chief on Wednesday will outline measures to galvanise the region's struggling car industry, focussing on innovation, low carbon emissions and using trade negotiations to fend off competition from emerging markets, EU sources said.
European Industry Commissioner Antonio Tajani could please environmentalists by emphasising regulation to foster a sustainable industry, but might disappoint those in the car industry who have called for more relaxed rules to help them cope with financial downturn.
Any finance available is likely to be in the form of preferential loans from the European Investment Bank, the sources said. They would help with the unprecedented amounts of cash needed for research and innovation, including a shift toward battery-powered vehicles.
All major car-makers except Volkswagen lost money in Europe last year. Withering sales mean the industry, which directly and indirectly provides more than 12 million jobs, has at least 20 percent more factories than needed, according to analysts and industry executives.
Competition from emerging nations is aggressive. Since an EU Free Trade Agreement with South Korea began to take effect in July 2011, 150,000 more South Korean cars have taken to Europe's roads.
Tajani is not expected to ask for a renegotiation of the South Korea deal, but he is looking for a stricter regime for the Japanese and Indian car sector and a level playing field.
"We need a less naive trade policy and we do not consider it a good idea to sacrifice the car industry," one of the EU sources said. "We consider it's a particularly innovative part of our manufacturing sector, and to lose capacity would be to lose competitiveness.
"We favour fair access to markets. We would be very happy to get an agreement with India and Japan."
Tajani will speak on Wednesday at a Brussels meeting of CARS 21, a policy group that gathers ministers from EU member states, auto executives, EU commissioners and trade union representatives.
The group has drawn up a report on the "competitiveness and sustainable growth" of the car industry as part of the debate that will feed into the EU legislative process.
The European car-makers' association ACEA and some of its members, including PSA Peugeot Citroen and Fiat , have called for EU-wide measures to tackle overcapacity.
A draft of the CARS 21 report seen by Reuters states that "current capacities will have to be adapted, new production methods devised", as the status quo cannot be maintained.
It also notes the "lasting effects of the crisis" are likely to be most marked in the European Union, as the United States took radical steps to restructure its industry.
Media reports have said the EU would soften its stance on car emissions to shield car-makers from rising costs.
EU sources said that was not the case, and the CARS 21 report seen by Reuters says EU 2020 carbon standards for cars and vans are "technically feasible".
Jean-Marc Gales, CEO of the European auto suppliers' association CLEPA, who was involved in drafting the report, also backed regulation toward lower carbon as part of the skilled, innovative industry of the future.
"Europe's industry is considered a world leader. We need regulation to keep that advantage," he told Reuters.
The report quotes an impact assessment on the cost of meeting 2020 low carbon standards, which found it was "less than previously anticipated". In addition, users and society would benefit from lower fuel consumption.
In 2009, the EU adopted rules that require car-makers to cut average car emissions to 130 grams of CO2 per kilometre (g/km) by 2015.
Car-makers are on course to meet that, and the bloc has a non-binding target of moving to 95g/km by 2020.
That has been surpassed by the United States, and China and Japan are catching up fast. Debate has begun in Europe on whether to make the 95g/km target legally binding, with Commission proposals expected later this year.
The industry is divided. Some have said new binding standards would be "extremely challenging". Others say they are achievable and a competitive advantage.
Green campaigners are unanimous that the right kind of regulation is the way forward.
"Strong, smart, effective regulation is a key driver of innovation. It will enable the European motor industry to retain its technological lead, boosting green jobs especially in the car industry's supply chain," said Greg Archer, programme manager for Transport & Environment.
Additional reporting by Charlie Dunmore; editing by Gunna Dickson and John Wallace