* Daimler scraps profit goal for second time in six months
* VW sticks to forecasts but braces for stiffer competition
* Europe car market could stay weak for many years - analyst
* Peugeot to seek cost-cutting concessions from unions
By Andreas Cremer
BERLIN, April 24 (Reuters) - Europe's deepening car market slump is starting to strain its most prosperous automakers as they respond to profit-crushing discounts imposed by loss-making rivals in a desperate battle for customers.
The region's car sales are heading for their sixth straight yearly decline to a two-decade low and industry forecasters now say the crisis could drag on for years.
German manufacturers with some of the industry's strongest brands have held up better than mass-market competitors such as France's loss-making Peugeot or Italy's Fiat.
But on Wednesday, Volkswagen and Daimler said their earnings dropped in the first quarter and Daimler scrapped a profit target for the second time in six months.
Volkswagen, which is Europe's biggest car maker, said it was bracing for "increasingly stiff competition in a challenging market environment", after withstanding most of the slump last year.
"We're not completely immune to the intense competition and the impact this has on business," the company said.
While Volkswagen held to a six-week old target to equal last year's record operating profit of 11.5 billion euros ($14.94 billion), Daimler said it no longer aimed to match its 2012 earnings before interest and tax from ongoing business of 8.1 billion euros, dropping the goal it had made just nine weeks earlier.
"Many markets developed worse than expected for economic reasons, especially in western Europe," Chief Executive Dieter Zetsche said.
Volkswagen, maker of the Golf hatchback, is counting on new models and signs of improving consumer confidence in Germany to brighten its fortunes in the second half of 2013. It pledged to push sales and deliveries to new records this year.
But Volkswagen is leaning heavily on its luxury unit Audi for profits. Meanwhile, its core namesake brand appears increasingly reliant on price cuts to keep sales growing.
Sales across the VW group's 12 brands were almost flat in March, but Volkswagen-brand deliveries - which account for almost a third of group profits - fell for the first time in over three years.
One VW dealer told Reuters the German giant has been pushing sales of models like the Golf or the Tiguan compact sport-utility vehicle since February with incentives under a special discount programme slated to run through June 30. The dealer withheld his name because the sales policy was confidential.
Underlying earnings at VW declined by a quarter to 2.34 billion euros, still beating a 2.29 billion-euro consensus estimate in a Reuters survey of analysts.
On a continent showing little sign of economic recovery, Volkswagen has coped best among mass-market manufacturers and may be best placed to weather the storm.
"There's a credible risk that the high-margin European market will remain in the doldrums for many years," said Stefan Bratzel, head of the Center of Automotive Management, an industry think tank near Cologne. "The problem is that Europe and particularly Germany are key contributors to German manufacturers' earnings."
First-quarter EBIT from ongoing business at Daimler plunged more than half to 917 million euros, missing even the lowest forecast of 930 million euros in a range of analyst estimates.
The Stuttgart-based company has fallen far behind BMW and Audi, due mainly to deep-seated problems in China.
The return on sales at its flagship Mercedes-Benz Cars division deteriorated further to 3.3 percent from 8.2 percent a year earlier. Finance chief Bodo Uebber blamed a slump in markets such as France, which have tended to be among the most profitable for the company in the past.
The CEO, Zetsche, said Daimler's second-half results should show an improvement on the first, citing growing momentum from cost reductions and the overhaul of models such as the flagship S-Class saloon and new products like the CLA four-door coupe.
Struggling rival Peugeot, which plans to scrap 8,000 jobs in France and closing a major assembly plant north of Paris, reported a 6.5 percent decline in first-quarter sales on Wednesday and said it would seek cost-saving concessions from unions to help meet turnaround targets.
Upcoming labour talks follow local rival Renault's deal with unions on a pay freeze and working-time cuts and may touch on similar measures, Peugeot finance chief Jean-Baptiste de Chatillon said. He ruled out further job or plant cuts.