The French state, which owns 15% of Renault, had been seeking more influence over the merged company, firmer job guarantees and improved terms for Renault shareholders in return for blessing the $35 billion (£28 billion) tie-up.

Renault, FCA and the French government all declined to comment on the ongoing board discussions.

The new understanding between Paris and FCA, nine days after the Italian-American carmaker pitched its offer, does not mean that Renault board approval is automatic, the two sources close to the talks also cautioned.

Renault directors meeting at the company's Boulogne-Billancourt headquarters outside Paris may decide on Wednesday whether to approve a memorandum of understanding or framework agreement that would begin the long process of a full merger.

FCA has been locked in talks with Renault and the French state over its bid to create the world's third-biggest carmaker. France has broadly welcomed the deal, on condition it guarantees Renault's domestic blue-collar jobs and plants.

(Reporting by Laurence Frost in Paris and Giulio Piovaccari in Milan; Additional reporting by Joe White and Gilles Guillaume; Editing by Susan Fenton and Matthew Lewis)

By Laurence Frost and Giulio Piovaccari