By Axel Schmidt, Christoph Steitz and Christina Amann

WOLFSBURG, Germany (Reuters) -Volkswagen (VWAGY) plans to shut at least three factories in Germany, lay off tens of thousands of staff and shrink its remaining plants in Europe's biggest economy as it plots a deeper-than-expected overhaul, the carmaker's works council head said on Monday.

Europe's biggest carmaker has been negotiating for weeks with unions over its plans to revamp its business and cut costs, including considering plant closures on home soil for the first time in a blow to Germany's industrial prowess.

Volkswagen reiterated on Monday that restructuring was needed and said it would make concrete proposals on Wednesday.

"Management is absolutely serious about all this. This is not sabre-rattling in the collective bargaining round," Daniela Cavallo, Volkswagen's works council head, told employees at the carmaker's biggest plant, in Wolfsburg, threatening to break off talks.

"This is the plan of Germany's largest industrial group to start the sell-off in its home country of Germany," Cavallo added, not specifying which plants would be affected or how many of Volkswagen Group's roughly 300,000 staff in Germany could be laid off.

The comments mark a major escalation of a conflict between Volkswagen's workers and the group's management, which is under severe pressure from high energy and labour costs, stiff Asian competition, weakening demand in Europe and China and a slower-than-expected electric transition.

They also heap further pressure on the German government to act on persistent weakness of its economy, which faces a second successive year of contraction with Chancellor Olaf Scholz's coalition searching for ways to spur growth. Scholz trails in the polls with federal elections due next year.

Volkswagen said in a statement that it would make proposals for how to cut labour costs on Wednesday, when workers and management meet for the second round of wage talks and the carmaker releases third-quarter results.

"The situation is serious and the responsibility of the negotiating partners is enormous ... Without comprehensive measures to regain competitiveness, we will not be able to afford essential investments in the future," Volkswagen Group board member Gunnar Kilian said.

Thomas Schaefer, who heads the Volkswagen brand division, said German factories were not productive enough and were 25-50% above targeted costs, meaning some sites were twice as expensive compared to the competition.