* European car sales fell 10.3 pct in March vs year ago -ACEA
* Peugeot, Toyota led March sales declines -ACEA
* Retail incentives rose in Jan-Feb -data
By Laurence Frost
PARIS, April 17 (Reuters) - PSA Peugeot Citroen and Toyota led European car sales 10.3 percent lower in March, as the unrelenting market contraction spread north, unnerving automakers.
Registrations dropped to 1.35 million cars last month, according to data published by the Association of European Carmakers on Wednesday.
That completed a near-10 percent decline for the first quarter that has prompted industry CEOs to trim their 2013 sales outlooks and prepare the ground for possible profit warnings.
Defying earlier industry predictions of a second-half rebound, European car sales are headed for a sixth straight annual decline to a two-decade low, threatening to undermine the best-laid turnaround plans and survival strategies.
While struggling Peugeot was among March's worst casualties, with a further 16.3 percent sales slump it can ill afford, European No. 1 Volkswagen AG posted a 15 percent decline for its namesake brand compared with a year ago as the German market shrank even more sharply.
Domestic sales are "still a critical driver of German (carmaker) earnings and the current trend is quite disturbing", Bernstein analyst Max Warburton said in a note this week.
"The risk is that Europe remains structurally very weak for many years."
It is a worrying prospect, and not just for Peugeot - which is cutting 8,000 jobs and a domestic plant to stay afloat. Chief Executive Philippe Varin says the outlook has worsened since the company forecast a European market decline this year of between 3 and 5 percent.
Ford Motor Co, also scrapping European plants and thousands of jobs, lost more ground as its sales tumbled 15.9 percent in March, eroding its quarterly market share to 7.3 percent from 8.2 percent.
Daimler AG, whose Mercedes-Benz cars have gained on BMW and VW's Audi so far this year, has nonetheless cautioned that it may have to trim 2013 profit expectations.
Mercedes sales bucked the decline with a 0.8 percent monthly gain, while the BMW brand fell 4.5 percent and Audi dropped 8.6 percent.
Fiat SpA also put up resistance with a modest 1.2 percent slide in group sales. That has not stopped CEO Sergio Marchionne from warning that its loss-making European operations may be further weakened by a drawn-out slump.
Toyota's 16.6 percent registrations decline in March compared with a year ago was worsened by a bigger drop in sales of its upscale Lexus models.
With no rock bottom in sight, cut-throat price competition can only toughen, piling up more losses for automakers in the region.
Average retail sales incentives in the top five markets - Germany, Britain, France, Italy and Spain - rose 13 percent to almost 2,400 euros ($3,200) per vehicle among volume automakers in January-February, according to industry data seen by Reuters.
South Korea's Hyundai Motor Co, among the biggest mass-market gainers last year, sounded a cautionary note even after lifting its combined market share with affiliate Kia Motors Corp by another half-point to 6.2 percent in the first quarter.
Hyundai is sticking to a more modest 2013 goal of defending its existing share of European sales, the brand's regional boss, Allan Rushforth, said in an emailed statement.
"No company is immune to the challenges facing the industry, so we're pleased to have maintained our momentum," he said.