UPDATE 1-German car sales extend decline in "weak" market
* German car market fell 8.5 pct in January - VDIK
* Economic recovery could boost demand in coming weeks
* Discounting at highest January level for years - analyst (Adds background and analyst comment)
BERLIN, Feb 4 (Reuters) - Germany's new car market was diagnosed in "weak" condition by overseas manufacturers after a further drop in sales reflected widespread declines in other key European regions.
New registrations in Europe's biggest auto market fell 8.5 percent in January to about 192,000 vehicles, the VDIK auto industry association for import brands in Germany said on Monday.
Among continental Europe's leading auto markets, Germany posted the smallest decline last year - only 2.9 percent - with 3.1 million vehicles sold.
Though the VDIK said that demand could pick up as the German economy bounces back from contraction last year, the Center of Automotive Research (CAR) at the University of Duisburg-Essen said that a possible rebound in sales would reflect broad-based discounting by manufacturers and dealers.
"The German auto market will become a buyers' paradise in the coming months," CAR's Ferdinand Dudenhoeffer said in a report published on Monday.
CAR's monthly index of special offers and discounts granted by dealers and car makers reached the highest January level since CAR began publishing the index more than seven years ago.
In spite of January's sales fall, the VDIK reaffirmed its forecast of 3 million-plus sales in Germany this year, citing hopes for the country's economic recovery.
Germany's business morale improved for a third consecutive month in January to its highest in more than half a year, the Ifo think-tank said in its widely watched monthly survey of 7,000 firms on Jan. 25.
Germany's January decline in car sales still compared favourably with the industry's performance in France, Italy and Spain.
French registrations dropped by 15 percent to their lowest January level since 1997 while Italian sales tumbled by 17.6 percent. Spain escaped with only a 9.6 percent contraction thanks to subsidies, according to data published on Feb. 1.
Overall European sales hit a 17-year low in 2012 as austerity-squeezed household budgets and rising joblessness deterred customers from making purchases.
Spain's new car market shrank by 13.4 percent in 2012, while France dropped 13.9 percent and Italy suffered a 19.9 percent decline, according to Brussels-based ACEA.
The UK was a rare exception, posting a 5.3 percent gain.
(Reporting by Andreas Cremer; Editing by David Goodman)