* Chancellor Merkel still expects to reach a deal with GM
* Bild reports Berlin gives condition for rival RHJ bid
* Fiat's interest in Opel has not changed - source
(Recasts adding comments from Merkel, sources)
By Thorsten Severin and Christiaan Hetzner
BERLIN/FRANKFURT, Aug 26 (Reuters) - The German government signalled on Wednesday that talks between Berlin and General Motors over the fate of its European unit Opel are threatening to drag on, raising the spectre of insolvency again.
Talks to sell Opel have dragged on for months and are a hot political issue ahead of German elections in September, because of the state support required for the eventual buyer.
Opel is surviving on a six-month 1.5 billion euro ($2.15 billion) bridge loan from the German state that is due to mature at the end of November, when a new investor was supposed to take control. Theoretically, Opel would have to file for insolvency if the debt is not rolled over, then as planned.
GM had originally planned to sell a controlling stake to a consortium led by Canadian auto parts supplier Magna, but GM management increasingly began to question the move when the U.S. carmaker emerged from fast-track bankruptcy proceedings just five days before the July 15 target.
Even after Magna submitted a 600-page finished contract backed by billions in German loan guarantees, the board of now state-owned GM shocked Berlin by refusing to approve the deal last Friday.
Chancellor Angela Merkel of the conservative Christian Democrats told German TV on Wednesday that she still hoped for a quick decision in favour of Magna, but the deal had to be sound.
"Content must come before speed. We will clear up the issues that still need to be resolved...I think there is a good chance that in the end we will come to an agreement," she told the N24 news channel.
Since the U.S. government said it won't finance GM's international operations, Merkel said GM would then be dependent on European aid if it wants to keep Opel afloat.
Worker representatives, like Armin Schild of the IG Metall labour union, fear that some at GM may not even be interested in that.
"I believe there are supporters at GM for three different concepts. The first want Magna, the second RHJ and the third insolvency. That's why the company is paralysed: there is always two-thirds majority against each concept," the trade unionist and non-executive Opel director told Reuters this week.
POKER TACTICS
Amid this conflict of interest, Italy's La Republicca published a report reviving the interest of Fiat in a deal with Opel. A deal is highly unlikely since the Italian carmaker, which pulled out of the bidding in May, does not intend to invest any of its own money in Opel, and both GM and Berlin oppose its interest.
"Our position is clear and hasn't changed. As our chairman and CEO have said many times, our proposal for Opel stays the same. We don't intend to modify it," a source at Fiat told Reuters.
Earlier, leading German tabloid Bild reported that the German government might be willing to drop its opposition to rival Opel bidder RHJ should the Brussels-based financial investor team up with an independent, global strategic partner from the auto industry.
Germany's Economy Ministry was not immediately available for comment, but a source familiar with RHJ's thinking downplayed the report, explaining the company was not even in direct talks with Berlin.
A GM source told Reuters on Monday the company was considering a third alternative that would see it inject billions into Opel to hold on to the company, though people close to the talks have said this might be a bargaining tactic.
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(Additional reporting by Angelika Gruber and Peter Dinkloh in Frankfurt and Gianni Montani in Turin; editing by Will Waterman and Erica Billingham)