BERLIN (Reuters) - Germany and France are close to an accord on reducing carbon dioxide (CO2) emissions from cars that could pave the way for the introduction of European Union-wide limits, a government source said on Thursday.

Germany is concerned that planned EU rules which would cap emissions at 120 grammes per km on average from 2012, and introduce fines for non-compliance, will put its luxury automobile industry at a disadvantage.

It has argued that all categories of car should have to cut emissions -- including smaller, less polluting vehicles produced by France and Italy that already meet the EU goal.

Officials from Berlin and Paris had thrashed out agreement or were making progress on almost all the sticking points, according to a German government source, who asked not to be named.

France wanted to have a deal in place by the time President Nicolas Sarkozy meets German Chancellor Angela Merkel in Bavaria on June 9, the source said.

As well as pushing to prevent what it sees as discrimination against larger cars, Germany has also pushed to get the proposed level of fines reduced.

The German source said this was the last major issue on which the two countries had yet to find a deal as France had no particular interest in altering the proposals.

Germany had also rowed back from an insistence that the new rules are phased in over three years to take account of car production cycles, a proposal France opposed, the source said.

Any deal struck between Germany and France will require the approval of their EU partners.

(Reporting by Markus Wacket, writing by Iain Rogers; Editing by Jon Boyle)