The board of cash-strapped French carmaker Peugeot has approved a capital tie-up with the French state and China's number two auto manufacturer Dongfeng, a source has told news agency AFP.

"The board meeting is over and everything has been approved," the source close to the deal said.

Under the deal, the French state and Dongfeng are expected to each inject €800 million for 14% stakes in the company.

The Peugeot family, which has controlled the firm since its founding in 1810, will see its 25% stake and 38% voting rights diluted to the same amount as the stakes for the government and Chinese state-controlled Dongfeng.

Peugeot, Europe's second-biggest carmaker, has been battered by a European slump in car sales and needed €7 billion in state-guaranteed refinancing last year for its credit arm.

The source said the board also approved a deal for a tie-up between Peugeot's financing arm and Spanish bank Santander, as well as the appointment of former Renault executive Carlos Tavares as the new CEO to replace Philippe Varin.