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* China August car sales sharply improve, aided by subsidies
* Momentum likely to extend to year-end if prices are cut
* Auto makers brace for slower H2 (Adds analysts, executive's quotes, details, background)
By Fang Yan and Ken Wills
BEIJING, Sept 1 (Reuters) - China's car sales in August rose 59.3 percent from a year earlier, bouncing surprisingly higher after sluggish sales in the summer months, helped largely by Beijing subsidies for fuel-efficient models.
The up-turn in demand in the world's largest car market could extend into September and October, the best auto sales season, and may continue into the winter months if automakers slash prices to drive sales, industry observers said.
"It's a big surprise! Everyone was expecting car sales to hit bottom in August, but they didn't," said Zhang Xin, a Beijing-based analyst with Guotai Junan Securities.
"The rebound shows that the intrinsic demand for automobiles is still there. A little policy incentive could make a big difference."
Beijing unveiled a pilot programme in five select cities in June to subsidise green car buyers, with handouts ranging from 3,000 yuan ($440.7) for fuel-saving models to as much 60,000 yuan for electric cars.
In August alone, sales of fuel-saving cars came to 129,600 units, up 32 percent from July, according to data provided by the China Automotive Technology & Research Center (CATRC).
"The handouts along with stepped-up promotions by auto dealers to cut inventory, especially for cars with 1.6 litre engines or smaller, and have spurred consumer demand," said the government-affiliated CATRC in a statement.
China has been a bright spot amid a still struggling global industry thanks to Beijing's policy incentives, including sales tax cuts for small cars.
But auto sales have started to lose some steam in the second quarter as Beijing taps on the brakes to keep its economy from overheating.
CATRC did not provide specific inventory levels for the first eight months. But it said passenger car inventory in August was equivalent to 58 days of sales, down from 60 days in July.
A total of 977,300 passenger cars were sold in August, up 59.3 percent from a year earlier, CATRC said.
That represents a big improvement in July when 822,300 cars were sold, up 15.4 percent. However, it is still shy of the situation in the first few months of the year when monthly auto sales easily topped the 1 million-unit mark.
Despite a strong rebound in August, many factors are restraining the pace of car sales, including a slowing economy.
Industry executives also said it was unrealistic to expect sales in China to keep up the sizzling pace of last year.
SAIC and its partner General Motors [GM.UL], competing mostly in the higher-to-medium market segments, are increasingly turning to smaller cities, hoping to grab market share from local brands such as Chery Automobile with affordable quality cars.
"The lower-end market is the fastest growing segment now and in the future. We are getting in there to compete with Chery and Geely," SAIC president Chen Hong had said.
Geely and Warren Buffett-backed BYD (1211.HK), however, are speeding up the launch of new models to win over customers.
BYD, whose F3 was the best selling car in China last year, plans to roll out new models, such as the S6 SUV, L3 and I6 sedans in the months to come, its chairman Wang Chuanfu told reporters in Hong Kong in late August.
"When the market slows, a broader portfolio and new models help," said Boni Sa, an analyst with IHS Automotive. ($1=6.807 Yuan) (Editing by Jacqueline Wong)