By Andreas Cremer and Ilona Wissenbach

BERLIN/FRANKFURT (Reuters) - Volkswagen's <VOWG_p.DE> efforts to reach a deal with labor leaders on cost cuts and strategy are faltering on the finishing straight, with both sides haggling hard over the details.

Herbert Diess, head of the German carmaker's core VW brand, wants to cut annual costs at the troubled division by 3.7 billion euros ($4.1 billion) through 2021 in a so-called future pact with workers, sources familiar with the negotiations told Reuters on Thursday, before he met staff at VW's Wolfsburg base.

Europe's biggest automaker needs to come up with savings at high-cost operations in Germany to help fund a shift to electric cars and self-driving vehicles while facing billions of euros in costs from its emissions scandal.

But its powerful works council, whose members occupy almost half the seats on the group's supervisory board, have said they will not back retrenchments without a commitment from management to fixed targets and quotas for products, output and investment.

"A collapse of the future pact continues to be possible because we are still lacking essential commitments from the company," works council bosses said on Thursday in a letter to German staff seen by Reuters.

Even if Diess can strike a deal, it may fall short of investors' hopes.

His plan would help to lift the operating margin at the VW brand, the group's largest by sales, to 4 percent by 2020 from an expected 2 percent this year, the sources said.

But that's less than a previous 6 percent target and below profitability benchmarks at rivals Renault <RENA.PA>, Peugeot <PEUP.PA>, Ford <F.N> and General Motors <GM.N>.

Evercore ISI analyst Arndt Ellinghorst, who has a "buy" recommendation on the stock, said a 4 percent margin target by the end of the decade was not good enough, adding VW had the potential to slash spending on physical assets, R&D and other items by about 22 billion euros over the coming five years.

Diess said management would need to shrink the VW brand's workforce but there would be no forced redundancies at the division which employs over 200,000 people worldwide, a third of the group's total, including 114,000 in Germany.

Diess, who was instrumental in cutting costs at BMW <BMWG.DE> before joining VW last year, was booed and interrupted several times when addressing the 20,000 workers at the staff gathering that was closed to the media, one participant said.

One of his proposals at the meeting was to increase the workweek for R&D engineers to 40 hours from 35, the participant said, without elaborating. While labour bosses said they oppose any steps that require changes to existing wage contracts, VW believes such a move is possible without altering contracts, a source at the company said.

About 3 billion euros of the proposed cutbacks would affect operations in Germany, two sources said.

VW declined to comment. The works council did not return calls seeking comment.

The new savings would follow a 5 billion euro efficiency programme announced by the VW brand in 2014, of which about 2.5 billion has already been realised, the sources said.

VW and the works council are meant to conclude the future pact in time for a supervisory board meeting on Nov. 18 which will ratify spending targets across the group for coming years.

"At the moment we are still quite a bit away from an agreement with the company," labour bosses said in their letter.

(Editing by Keith Weir and Mark Potter)