Last week, the Bush administration agreed to provide US$25 billion in low-cost loans to help revive ailing US car makers, authorised in a 2007 energy law that requires the industry to improve the fuel efficiency of vehicles by 40 percent by 2020.

But the European Commission rejected the demand for a loan that would equate to over one third of the annual EU budget.

"This idea does not even merit discussion," said a source at the European Commission, which originated the proposal to cut CO2 from new cars to 130 grams per kilometre.

EU member states are divided over the Commission plan.

Auto-making nations led by Germany, which specialises in powerful, heavy luxury vehicles such as Mercedes and BMW, which emit the most greenhouse gases, have pressed for a softening of its terms.

Car makers argue that a rush to legislate puts jobs and export earnings at risk, because there is no guarantee consumers will buy greener cars when they are put on the market.

An ACEA spokeswoman said 40 billion euros equated to just two years of the research and development budget for Europe's car industry and the group was trying to kick-start a discussion of how the EU might support its car makers in a time of change.

"Car makers face increasingly hesitant consumers and call on governments to respond, stimulate the economy ... and restore consumer confidence," said ACEA President Christian Streiff, who is also chief executive of PSA Peugeot Citroen.

"Only then will consumers have the means and the confidence to invest in new vehicles."

ACEA is also asking the EU to bring in incentives for car owners to scrap vehicles over eight years old over a three-year period to speed up fleet renewal.

Tightening environmental legislation comes as vehicle sales in Europe are falling. The industry recorded sharp drops in July and August and a total decline of 3.9 percent in the first eight months of the year. (Reporting by Helen Massy-Beresford in Paris and Pete Harrison in Brussels; editing by John Stonestreet)