PARIS (Reuters) - PSA Peugeot Citroen's (>> PEUGEOT) new boss Carlos Tavares vowed to halt losses and restore profitability at its core manufacturing division in 2018, as he set out a long-awaited recovery plan for the struggling French carmaker.

Unveiling his 'Back in the Race' plan on Monday, Tavares promised to achieve a 2 percent operating margin and reverse losses in Europe and emerging markets by reducing costs, excess plant capacity and the number of vehicles on offer.

Investors welcomed a return to positive earnings goals but were sceptical at the size of the task. Peugeot shares, which have risen almost 50 percent so far this year, were down 2.8 percent at 0909 GMT.

"While they see themselves as back in the race, they don't seem to realize that the competition is moving forward just as quickly," Barclays analyst Kristina Church said.

"They actually need to start spending ahead of the competition."

The carmaker, which slashed capital expenditure to 4.4 percent of revenue last year, pledged on Monday to develop new plug-in hybrids, four-wheel-drive powertrains and self-driving cars - all while limiting investment to 7-8 percent of sales, compared with 8-10 percent for mass-market peers.

"We are going to focus the creative power of our teams on a more limited number of products that people want to buy," Tavares said in a presentation to investors.

After losing more than 7.3 billion euros in two years, Peugeot struck a rescue deal in February to sell 14 percent stakes to the French government and China's Dongfeng Motor Group (>> Dongfeng Motor Group Co. Ltd) as part of a 3 billion euro cash infusion.

Tavares, formerly second-in-command to Carlos Ghosn at Renault (>> RENAULT), took over operational control from outgoing Peugeot CEO Philippe Varin that same month before his formal appointment in March.

"RIGHT DIRECTION"

The margin goal, while short of the Volkswagen (>> Volkswagen AG) brand's 2.9 percent and far behind such rivals as Toyota (>> Toyota Motor Corp), nonetheless cheered analysts: Peugeot's 1.04 billion euro auto division loss last year amounted to a negative 2.9 percent margin.

"PSA is heading in the right direction," said Erich Hauser of ISI Group in London.

The turnaround strategy "does remind us of what Tavares did at Renault", Hauser said. "Europe can continue to deliver positive surprises."

The streamlined model offering will help Peugeot's struggling operations in Russia and Latin America return to profit within three years, Tavares said.

Reiterating the carmaker's commitment to halt cash burn by 2016, he targeted cumulative positive cash flow of 2 billion euros over the next three years, 2016-18.

Peugeot will make full use of a competitiveness deal struck with labour unions at the height of the crisis to reduce costs and headcount, Tavares added, cutting overall wage costs to 12.5 percent of revenue in 2016 from 15.1 percent last year.

In a sign that more strife with unions may be around the corner, Tavares said Peugeot planned to move 20 percent of research and development activities out of France.

It will save more cash by doubling the supply of parts from lower-wage countries and "rightsizing" French plants, he said, while raising production at more competitive sites in Slovakia, Spain and Portugal.

"On the pretext of financial objectives, Mr Tavares's roadmap represents a further step against wages and jobs," said Jean-Pierre Mercier, an official with the left-wing CGT union.

(Additional reporting by Natalie Huet and Andrew Callus; Editing by Sophie Walker)

By Laurence Frost and Gilles Guillaume