By Gleb Stolyarov

MOSCOW, Feb 11 (Reuters) - Italian carmaker Fiat SpA's

FIA.MI plan to assemble its Ducato van in Russia has been put on hold due to a contractual dispute with its Russian partner, two sources close to the matter said.

Many western carmakers have invested heavily in recent years in Russia, which had been expected to overtake Germany as Europe's biggest market, but Russian car and van sales have been falling as the economy faltered and are expected to remain weak this year.

Fiat and Mosavtozil, a joint venture between Russia's top lender Sberbank SBER.MM and the city of Moscow to produce light commercial vehicles (LCVs) at the Moscow government's century-old vehicle maker Zil, signed a preliminary agreement to assemble Fiat Ducatos last year, with a view to starting production in the first quarter of 2014.

However, the start of production has been postponed after the sides failed to agree final terms, the sources said. As a result, a state invitation to tender for the supply of 500 million roubles ($14 million) worth of equipment needed to set up production was cancelled last week, one of them added.

Igor Kulgan, head of Mosavtozil, confirmed the tender was cancelled, referring to the lack of a legally-binding agreement between Fiat and Mosavtozil.

Fiat declined to comment.

Sberbank had previously opened a 16 billion-rouble credit line for Mosavtozil and a source at the bank said the lender would still support the van project.

Mosavtozil secured preliminary agreements to assemble both Fiat Ducatos and French group Renault's RENA.PA Master vans last year. ID:nL6N0G92M9

Renault is still considering the project and has yet to make a final decision, its Moscow-based representative said on Tuesday.

Previously Mosavtozil planned to assemble at least 40,000 LCVs a year at the Moscow site but Russia's LCV market fell by 3.4 percent to 179,727 vehicles last year.

Fiat, which unlike many western peers including Renault, does not have its own production in Russia, failed to get a foothold when the market was still growing, said Vladimir Bespalov, an analyst at VTB Capital.

"Now is not the best moment to set up production - the sales keep falling and competition is only increasing," he added.

Fiat's Russian sales fell by 7 percent last year to 8,000 cars and vehicles, which compared with a 5.5 percent fall in the total market, putting it in 36th position in terms of sales volumes, according to the Association of European Businesses.

($1=34.8117 Russian roubles)

(Additional reporting Maria Kiselyova; Writing by Maria Kiselyova and Polina Devitt; Editing by David Goodman and Greg Mahlich)

((maria.kiselyova@thomsonreuters.com)(+7 495 775 1242)(Reuters Messaging: maria.kiselyova.thomsonreuters.com@reuters.net))

Keywords: RUSSIA FIAT SPA/