UPDATE 1-American Axle, Israel's REE to develop electric-vehicle propulsion system

(Adds details on American Axle's agreement with U.S. Department of Energy)

May 7 (Reuters) - Automobile parts maker American Axle & Manufacturing and Israel's REE Automotive will jointly develop an electric propulsion system to tap accelerating demand for battery-powered vehicles, the companies said on Friday.

The propulsion system, which powers automotive vehicles, will incorporate American Axle's electric drive units into Ree's technology that integrates all the traditional vehicle chassis components into the arch of the wheel.

The electric drive units will be developed by American Axle in Detroit and prototypes will be delivered by the end of the year. Further terms of the deal were not disclosed.

"This agreement to provide electric drive technology ... is an important step in growing AAM's electric propulsion business," said American Axle Chief Executive Officer David Dauch.

Earlier this year, REE agreed to go public through a merger with blank-check company 10X Capital Venture Acquisition Corp in a deal that valued the electric-vehicle technology startup at around $3.6 billion.

Investors in the transaction included Mahindra and Mahindra and auto supplier Magna International.

Separately, American Axle said it will receive $5 million in funding from the U.S. Department of Energy to advance the development of its electric drive technology. (Reporting by Shreyasee Raj in Bengaluru; Editing by Devika Syamnath)