UPDATE 2-Peugeot sales decline slows but Q3 disappoints

* Q3 group sales down 7.7 pct at 11.782 bln euros

* Decline smaller than in previous quarters

* Q3 total assembled vehicle unit sales up 4.7 pct

* Auto revenue down 4.1 pct at 9.256 bln euros

* Shares fall 7.2 pct in early trade

(Adds share price, analyst comment)

By Helen Massy-Beresford

PARIS, Oct 21 (Reuters) - French carmaker PSA Peugeot Citroen (PEUP.PA) said third-quarter revenues slowed less sharply than in previous quarters as it boosted market share in Europe, where governments launched car buying incentives.

Peugeot Citroen shares fell over 7 percent in early trading as the revenues fell short of analyst expectations buoyed by forecast-beating earnings from German rival Daimler (DAIGn.DE) on Monday. [ID:nLJ110512]

European car makers have cut production and reduced costs after auto sales dropped by their biggest fall for 15 years in 2008 and government incentive schemes have helped attracting clients to showrooms again, and order new cars.

This has especialy boosted smaller models, such as a large part of the Peugeot and Citroen line-up, but not the bigger cars such as the C6 or Peugeot 607.

"What we have today is a revenue disappointment and no obvious sign of the large production re-ramp that many have anticipated," Morgan Stanley analysts wrote.

"We would expect a dose of profit-taking today." Third-quarter revenue at the group fell 7.7 percent, compared with a 24.9 percent year-on-year fall in the first quarter and an 18.9 percent drop in the second, Peugeot said in a statement on Wednesday.

The carmaker said it felt the benefit of scrapping schemes, whereby drivers get a discount on new models when they scrap their old vehicle. This applied in France, Italy and the UK, but especially in Germany, Europe's biggest car market.

European markets were mixed in the third quarter, however, with a negative impact from central and eastern European markets, the company said.

The overall European car market decreased just 0.3 percent in the third quarter, compared with a 14.4 percent decline in the first six months of the year, Peugeot said.

Chief Executive Philippe Varin said last month he expected the European market to be down around 10 percent this year.

Peugeot increased overall market share in Europe to 13.4 percent compared with 12.9 percent a year earlier.

The market for light commercial vehicles remained "very weak" in the quarter, Peugeot said, adding that it increased market share to 22.1 percent from 19.2 percent in this segment.

Inventories of unsold vehicles -- a major cash concern for carmakers when the crisis hit last year -- decreased by 36 percent to 400,000 vehicles compared with 628,000 at the start of the year, the company said.

SHARES DROP

Shares in Peugeot were 5.65 percent lower at 22.85 euros by 0904 GMT, making them the biggest fallers on a 1.77 percent weaker DJ Stoxx European autos index .SXAP. They also led declines on the French blue-chip CAC 40 index .FCHI.

"The factors behind our view that 2010 can see positive surprises remain intact; we see nothing incremental today to improve the case," the Morgan Stanley analysts added.

Daimler on Monday posted a fall in third-quarter earnings before interest and tax to 470 million euros that beat the Thomson Reuters I/B/E/S consensus estimate of 141 million. It said it expected free cash flow to be positive for the year.

On Tuesday, French car parts makers Faurecia (EPED.PA), 70 percent owned by Peugeot, and Valeo (VLOF.PA) made upbeat statements about the rest of the year.

Valeo said it was increasing its second-half production forecast after a third-quarter profit, and Faurecia raised its outlook for second-half sales. [ID:nLK412242]

PSA's domestic rival, Renault (RENA.PA), is due to report third-quarter sales on Oct. 29. Italian auto maker Fiat SpA (FIA.MI) is due to post results later on Wednesday. (Reporting by Helen Massy-Beresford; Editing by James Regan/Marcel Michelson)