UPDATE 2-China May car sales growth slowest this year

* May car sales up 26 pct, slowest monthly rise this yr

* Growth will be slower in summer, monthly declines possible

* To rebound in traditionally stronger season in autumn

* Foreign automakers keep expanding (Adds comments from analyst, official, graphic, details)

By Fang Yan, Michael Wei and Jacqueline Wong

BEIJING/SHANGHAI, June 8 (Reuters) - China's passenger car sales rose at their slowest pace this year in May, setting the stage for more moderate growth in 2010 but foreign automakers' interest in the world's biggest car market is unlikely to let up.

China's auto market, which eclipsed the United States last year, has become a safe haven and a key battlefield for foreign carmakers still recovering from a steeper than expected industry downturn.

"There is no doubt that market growth this year will be slower compared with 2009, but no one can afford to lag behind in China as it will remain the fastest growth major market in the world," said Zhang Xin, a Beijing-based analyst with Guotai Junan Securities.

May passenger car sales rose 26 percent from a year earlier, with a total of 1.04 million sedans, vans and sport utility vehicles sold, compared with 1.11 million units moved in April, the official China Association of Automobile Manufacturers (CAAM) said on Tuesday.

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For a graphic:

r.reuters.com/san78k

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The frantic pace of car sales growth in China started tapering off in April when sales rose 33 percent, about half of the pace in March, which analysts attributed to a higher comparative base a year earlier.

A more moderate pace is expected for the rest of the year, given rampant auto sales growth in 2009 especially since the second quarter, propelled by government incentives to boost consumption along with a near $600 billion economic stimulus plan.

"Auto sales actually fell in January 2009. It wasn't until April that the market started to pick up strongly," said Chen Liang, an analyst with Huatai Securities.

"The May data is still pretty solid, but it's just impossible to match last year's run-away growth rate especially in the second half."

Analysts expect car sales will return to a slower but more rational growth rate of roughly 20 percent in 2010, due largely to pent-up demand in smaller cities where cars are no longer a luxury item as wealth grows.

"The market was pumped up last year by government policies. Tax incentives and other measure still play a role this year, but the market is gradually returning to its natural growth pattern," said Huang Zherui, an analyst with global industry consultancy CSM Worldwide.

Overall vehicle sales, including buses and trucks as well as cars, totalled 7.6 million units in May, up 53 percent from a year earlier, official data showed.

Dong Yang, executive vice chairman and secretary general of CAAM, told a news conference in Beijing that China's auto sales for the full-year 2010 was estimated to rise 15 to 20 percent.

EXPANSION PLANS

Foreign automakers, meanwhile, continue to invest for the long term, expanding their foothold in the fast-growing market against a backdrop of labour discontent that recently shut down all of Honda Motor's (7267.T) four Chinese car plants. [ID:nTOE65701L]

General Motors [GM.UL], which already makes cars and light commercial vehicles with SAIC Motor and FAW Group, is selecting a site for a greenfield China plant, executives have said. [ID:nTOE60M00T]

Arch-rival Volkswagen AG (VOWG.DE) also pledged in April to add an additional 1.6 billion euro ($1.91 billion) to its previously announced 4.4 billion euro China investment scheme.

PSA Peugeot Citroen (PEUP.PA) aims to start building its third China plant with partner Dongfeng Motor Group Co (0489.HK) by the end of this year. It has also signed an initial deal to make light commercial vehicles and passenger cars in partnership with Chongqing Changan Automobile Co (000625.SZ) [ID:nTOE64502T].

"They are making the right moves. They are investing for the future," said Guotai Junan Securities' Zhang. ($1=.8390 Euro) (Editing by Valerie Lee)