An Uber car is seen parked with the driver's lunch left on the dashboard in Venice, Los Angeles, California, United States July 15, 2015. REUTERS/Lucy Nicholson

By Edward Taylor and Harro Ten Wolde

FRANKFURT (Reuters) - Ride-hailing service Uber [UBER.UL] has sounded out car companies about placing a large order for self-driving cars, an auto industry source said on Friday.

"They wanted autonomous cars," the source, who declined to be named, said. "It seemed like they were shopping around."

Loss-making Uber would make drastic savings on its biggest cost -- drivers -- if it were able to incorporate self-driving cars into its fleet.

Volkswagen's Audi , Daimler's Mercedes-Benz, BMW and car industry suppliers Bosch and Continental are all working on technologies for autonomous or semi-autonomous cars.

Earlier on Friday, Germany's Manager Magazin reported that Uber had placed an order for at least 100,000 Mercedes S-Class cars, citing sources at both companies.

The top-flight limousine, around 100,000 of which Mercedes-Benz sold last year, does not yet have fully autonomous driving functionality.

Another source familiar with the matter said no order had been placed with Mercedes-Benz. Daimler and Uber declined to comment.

Auto industry executives are wary of doing deals with newcomers from the technology and software business who threaten to upend established business models based on manufacturing and selling cars.

"We don't want to end up like Nokia's handset business, which was once hugely profitable...then disappeared," a second auto industry source said about doing a deal with Uber.

NOT SO DISTANT DREAM

So-called "autonomous vehicles" have for years been a distant dream but technology advances and a push by Google , with its huge financial resources, to introduce a prototype have shifted the race to build them up a gear.

Analysts at Exane BNP Paribas have said they see a $25 billion market for automated driving technology by 2020, with vehicle intelligence becoming "the key differentiating factor". But the brokerage does not expect fully automated cars to hit the road until 2025 or 2030, in part due to regulatory hurdles.

In August 2013, Mercedes-Benz responded to the Google push by developing an S-class limousine that drove between the German towns of Mannheim and Pforzheim without any driver input. The 103 km stretch is known as the Bertha Benz route, named after the driver of the first ever car, around 130 years ago.

Earlier this week Mercedes rival BMW said it was considering launching its own ride hailing service in what would amount to a rival business to Uber.

"The value creation is shifting from the actual hardware toward software and services," BMW's new Chief Executive Harald Krueger said on Wednesday. That shift is expected to accelerate with the emergence of computer-driven autonomous vehicles, and BMW is investing in software and technology expertise as a result.

A key hurdle to driverless cars has been the question of liability in the event of an accident. Most countries are signatories to the 1968 United Nations Convention on Road Traffic which stipulates that a person, rather than a computer, must be in control of a vehicle.

In February this year, U.S. vehicle safety regulators softened the rules to allow driverless cars, by saying an artificial intelligence system piloting a self-driving Google car could be considered the driver under federal law, a major step toward ultimately winning approval for autonomous vehicles on the roads.

Individual states and some countries have granted permission to test self-driving cars. The U.S. state of Nevada passed a law in June 2011 to allow test drives of autonomous vehicles there.

Auto industry executives say regulators are likely to help pass legislation for self-driving cars if these help cut congestion and pollution.

(Reporting by Edward Taylor and Harro ten Wolde and Jan Schwartz; Editing by Maria Sheahan and Keith Weir)