Struggling French carmaker PSA Peugeot Citroen has sealed a long-awaited rescue deal that will see its founding family cede control of the company.

China’s Dongfeng Motors and the French government will each invest about 800m euros (£660m) in return for 14% stakes.

Another 1.4bn euros will be raised from existing investors in Peugeot.

The deal is still subject to a shareholder vote but will provide much-needed cash to keep Peugeot afloat after government guarantees expire.

Should the deal be approved, the Peugeot family's 25.4% stake will be diluted to 14%, matching that of the French government and the Chinese carmaker.

Europe’s second-largest carmaker also announced its latest financial results on Wednesday, warning that it may face losses until 2016.

Peugeot said its net loss narrowed to 2.32bn euros last year, compared to a 5bn-euro loss in 2012.

Sales also fell by 2.4% from a year earlier to 54.1bn euros, due to tepid demand for new cars in Europe.

There have been months of talks over the fate of the French carmaker, and reports say the deal is likely to be formally signed in March.

In a statement to the Hong Kong stock exchange, Dongfeng said the deal is meant to “expand and deepen their current cooperation” with Peugeot.

It also said the venture would “strengthen overseas cooperation to achieve the objective of selling 1.5 million vehicles under the Dongfeng, Peugeot SA and Citroën brands per year starting from 2020.”

Peugeot already has a joint venture with Dongfeng, which is one of China’s newer car brands and is known for its heavy trucks and “Fengshen” line of vehicles.

However, the new arrangement is expected to bring an increase in production and a new research and development centre.

Dongfeng is also expected to promote the Peugeot brand in the fast-growing car markets in South East Asia.

The deal also makes Dongfeng the latest Chinese carmaker to buy into a Western competitor.

Last year, Zhejiang Geely Holding bought London black cab-maker Manganese Bronze Holdings for £11.4m after the company went into administration. Geely also bought Sweden’s Volvo brand in 2010.

Peugeot was founded 200 years ago and is one of France’s oldest industrial dynasties.

The company began in 1810 as a maker of tools and coffee mills, which are still marketed under its name.

However, it has faced financial difficulties and shrinking market share over the last few years.

Peugeot signed an investment deal with General Motors in 2012, but the US carmaker offloaded its stake in the loss-making company in December.

Last year, it also faced criticism for closing its Aulnay-sous-Bois plant in the Paris suburbs in an attempt to cut costs.

The French government said earlier this week that further plant closures were “not on the agenda” once it became a major shareholder.

French Industry Minister Arnaud Montebourg also reportedly said the deal would “prepare Peugeot’s renaissance and the international development of a company that had become isolated.”

•Text courtesy BBC.

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