* Fiat fights off challenge to control
* RCS shares fall to lowest since 1997 listing (Recasts, adds background, analyst comment)
MILAN, July 17 (Reuters) - Carmaker Fiat has won a battle for control of RCS MediaGroup, quelling already faint hopes of a buy out and sending shares of the influential Italian publisher to a 16-year low on Wednesday.
RCS is a relatively small publisher compared to its European peers, but for Italy's business elite it is a much coveted asset because its flagship newspaper, Corriere della Sera, plays a key role in shaping public opinion.
The move gives Fiat, Italy's largest employer, control over three national newspapers at a time when the carmaker is under fire from unions and politicians for putting investment in new car models in Italy on hold.
Fiat emerged as RCS's largest shareholder on June 28 with the surprise announcement it spent about 90 million euros ($115 million) to almost double its stake to 20 percent. The results of an auction of unsubscribed rights announced late on Tuesday effectively ruled out any other investor rivalling that stake.
Loss-making RCS completed a vital 410 million-euro rights issue this week, but left a portion of unsubscribed rights that could have potentially allowed investor Diego Della Valle to challenge Fiat.
Della Valle, chairman of luxury shoemaker Tod's, has publicly blasted Fiat over RCS's strategy and threatened to increase his stake to over 20 percent from below 9 percent.
But data released by the company on Tuesday showed the auction of unsubscribed rights - the last chance for Della Valle to up his stake - gave unknown investors a holding in the publisher of only 6 percent.
Media investment is not new to Fiat. Fiat has held a stake in Turin daily La Stampa since 1924, and has invested in RCS on and off since the 1970s. Fiat's controlling shareholder Exor also holds a stake in The Economist, and Exor Chairman John Elkann sits on the board of News Corp.
Nor is it unusual in Italy for industrial groups to hold stakes in media companies. Rome daily Il Messaggero is controlled by a construction magnate, and Corriere's competitor La Repubblica is controlled by the CIR conglomerate.
Fiat has said its investment in RCS is strategic. A person familiar with the matter said it would give the publisher's management the stability it needs to continue with a turnaround plan.
Shares in RCS MediaGroup fell to their lowest level since listing 16 years ago on Wednesday as the speculative appeal of the shares collapsed. The publisher is controlled by a shareholders' syndicate where Fiat holds its stake along with other investors.
By 1302 GMT RCS fell 3.2 percent to 1.17 euros and Fiat was down 0.7 percent at 5.83 euros.
$1 = 0.7612 euros Reporting by Jennifer Clark and Danilo Masoni; editing by Patrick Graham