UPDATE 2-VW says Q3 very good, sees drop in Germany in 2010

* Sees German market falling sharply next year

* VW to pay 3.9 billion euros for 49.9 pct Porsche AG stake

* VW CEO says Russian auto market rising 30 pct by 2018

(Recasts, adds PM Putin tour, Wittig quotes, Porsche AG news)

By Edward Taylor and Gleb Bryanski

FRANKFURT/GRABTSEVO, RUSSIA, Oct 20 (Reuters) - Volkswagen AG (VOWG.DE) clinched a 49.9 percent stake in Porsche AG and said it had "very good" sales in the third quarter, though sales in Germany are set to drop in 2010.

Volkswagen said on Tuesday it would pay 3.9 billion euros ($5.8 billion) to take a bigger-than-planned 49.9 percent stake in Porsche AG as a first step to a full merger with Porsche SE (PSHG_p.DE) by 2011.

In August VW had said it would buy a 42 percent stake.

Separately at an event in Russia VW sales chief Detlef Wittig reiterated he expected demand for cars in Germany -- the auto maker's second largest market behind China -- to slump as tax incentives were phased out.

Wittig said he expected overall demand for cars to fall below 3.0 million units in Germany in 2010 from 3.7 million this year. Volkswagen has not specified what impact this might have on sales for the company.

Thanks to the help of incentives which encouraged consumers to buy smaller cars, Europe's largest auto maker had better-than-expected sales in the third quarter, leading the company to reiterate it expects to match 2008's sales levels.

"We will be stable this year in terms of unit sales. This is better than what we have expected. Third quarter was very good," Wittig said.

In 2008 VW delivered about 6.2 million vehicles globally. It is due to report third-quarter results on Oct. 29.

Wittig said Volkswagen needed to digest its deal with Porsche before considering other acquisitions. "This is the hell of a job to be done. That's for the time being good enough for us," he said. [ID:nLG139328] [ID:nLK501692]

RUSSIA TO GROW

The Russian car market, which halved this year because of the financial crisis, will rise as much as 30 percent from its peak 2008 levels by 2018, Volkswagen Chief Executive Martin Winterkorn said.

He told reporters he saw sales of about 3.6 million in Russia annually by that time. Volkswagen sold about 100,000 cars in Russia in 2009. It is the No.3 foreign car brand in Russia.

VW hopes to assemble 150,000 units in Russia next year, up from 63,000 units expected this year. It has a plant in Grabtzevo some 170 km west of Moscow.

VW plans to launch a new budget model in Russia in 2010 and to more than double local production, betting on rising demand for cheap cars, another executive said.

Russian Prime Minister Vladimir Putin, who has repeatedly called on global car makers to build full-cycle production in Russia to help the country modernise its economy, toured the VW factory on Tuesday.

VW said it would produce five models next year including the Skoda Octavia and Fabia, VW Passat and Tiguan and a new model based on the VW Polo, which has yet to be given a name.

It will cost around 440,000 roubles ($14,990), competing with the likes of the Ford (F.N) Focus in the most popular Russian price segment, and would be eligible for the government's car loan subsidy scheme.

"It is a big secret and I promised to keep my mouth shut but I think it will be a very good model for Russia," Putin said, adding, however, he would not swap his Russian-made Niva off-roader, made by near-bankrupt Avtovaz (AVAZ.MM), for a VW.

However, Volkswagen's advantage may be short-lived as competitors follow suit.

A representative of Audi told reporters the VW unit plans to start assembly in November, while a representative for Peugeot-Citroen (PEUP.PA) said it will assemble 45,000 cars in Russia from March 2010. (Additional reporting by Gleb Stolyarov; Writing by Edward Taylor, Dmitry Zhdannikov, Helen Massy-Beresford and Gleb Bryanski; Editing by David Holmes) ($1=29.35 Rouble)