By Kevin Krolicki and Philipp Halstrick

DETROIT/FRANKFURT (Reuters) - The board of General Motors Co has opted to keep Opel, undoing months of painstaking negotiations to sell the European unit to a Russian-backed group led by Canada's Magna.

GM confirmed the decision made by its 13-member board after a meeting of directors on Tuesday in Detroit, saying that improving business conditions and the strategic importance of Opel to its operations had prompted the move.

The decision represented a setback for Magna, raised the risk of conflict with Opel's European unions and left open the question of how GM would finance a plan to go it alone on Opel four months after the U.S. automaker emerged from a bankruptcy financed by the Obama administration.

The decision by the GM board also marked a sharp break in direction from the course for Opel endorsed by GM Chief Executive Fritz Henderson who had said a sale of the European unit was the most likely outcome two weeks ago.

GM said it expected that restructuring Opel on its own would cost about 3 billion euros ($4.41 billion).

"GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration," Henderson said in a statement.

The meeting of the GM board came after European Union officials challenged the terms of the funding Germany had pledged to support the sale of Opel to Magna.

Germany had promised 4.5 billion euros ($6.58 billion) in aid to help close the Magna deal, which was widely seen as the option for Opel most likely to preserve jobs.

But EU officials said GM needed to confirm that it would have agreed to sell Opel if Germany had made clear that the same funding would have been available to any buyer.

GM's board had opted to sell a 55 percent stake in the loss-making Opel unit to Canadian group Magna and its partner Sberbank.

The Opel saga has been running for almost a year. GM first asked Germany for loan guarantees in November 2008. The automaker had been seeking a buyer for the unit, which includes the Opel and Vauxhall brands, since March.

Auto analysts said keeping Opel would allow GM to maintain control of vehicle development and share parts across a few global platforms, much as Ford Motor Co has done in its turnaround.

"If they are going to be competitive on a global scale, they really don't have much choice but to keep Opel," said Autoconomy analyst Erich Merkle.

GM's move is a setback for Magna founder and chairman Frank Stronach, who left his native Austria at age 21 as an impoverished toolmaker but went on to build one of the world's biggest car parts groups.

Magna had no comment on the GM decision.

The German state of Hesse's premier, Roland Koch, said he was angered by GM's decision not to sell Opel to Magna, and that he wanted GM to pay back its bridge loan by Nov. 30.

Opel's workforce -- which was to be cut by a fifth under the new owners from 50,000 -- was supposed to receive a 10 percent stake in the new company in return for 265 million euros in annual cost concessions.

GM would have kept a 35 percent stake in the unit under the now-scrapped deal.

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(Reporting by Kevin Krolicki and Philipp Halstrick, additional reporting by Gernot Heller in Berlin; John Crawley, Jui Chakravorty, Soyoung Kim, David Bailey in Detroit and Ben Klayman in Chicago, editing by Matthew Lewis)