UPDATE 1-Toyota to cut Prius output on slowing sales-source
* Toyota cutting Prius output by 10 pct from March - source
* Toyota Prius sales in U.S. down 40 pct from October peak
* Toyota: demand outlook uncertain, no expansion decision yet (Updates throughout with details from source, company comment)
TOKYO, March 15 (Reuters) - Toyota Motor Corp (7203.T) is slashing its output of the Prius hybrid model by 10 percent starting this month due to a slowdown in sales from a peak last year, a source at a group company told Reuters on Monday.
Toyota, the world's biggest automaker, had been building a combined 50,000 Priuses a month at two Japanese factories since the third-generation model debuted last May.
That will drop to about 45,000 units from March, the source said, declining to be identified because Toyota does not make those production plans public.
Global sales of the Prius continue to grow from the year earlier, but in February dropped about 40 percent in the United States compared with a peak in October.
The third-generation Prius has topped Japan's best-selling chart for the past nine months thanks to generous subsidies and tax incentives on fuel-efficient models. Customers placing an order today still wait more than three months for delivery, but that is down from eight months at the time of launch.
Earlier on Monday, industry newspaper Nikkan Kogyo Shimbun said Toyota would add production of the Prius at a third Japanese factory from September to shorten delivery time to customers, with plans to build another 6,000 a month at the Motomachi factory in central Japan. The Motomachi site built the first-generation Prius launched in 1997.
Toyota spokesman Paul Nolasco denied the report.
"The outlook for Prius demand is uncertain, and we have made no decision to raise output, including the location of such a move," he said.
Toyota has indefinitely suspended completion of a new assembly plant in Mississippi earmarked for Prius production as the global financial crisis hammered sales worldwide.
Meanwhile, Toyota's Tsutsumi factory and another plant at unit Toyota Auto Body Co 7221.T have been working overtime to produce the fuel-sipping Prius, and Toyota had internally considered back in January adding production at the Motomachi factory in September.
But the group source said that plan could also be delayed as a recall crisis spanning more than 8 million Toyota and Lexus cars worldwide throws a sales recovery into doubt.
Toyota has issued a voluntary recall for the latest Prius to fix a braking glitch, and a separate recall for the previous Prius model for risk that floor mats could get trapped under the accelerator pedal, causing unwanted acceleration. (Reporting by Yoshifumi Takemoto and Chang-Ran Kim)