* Sales fell 10.3 pct in March - industry body ACEA
* Peugeot, Toyota led March sales declines
* Retail incentives rose in Jan-Feb - data
By Laurence Frost
PARIS, April 17 PSA Peugeot Citroen and Toyota led European car sales 10.3 percent lower in March, as an unrelenting market contraction spreads to the region's more prosperous north, unnerving automakers.
Registrations dropped to 1.35 million cars last month from 1.5 million a year earlier, the Association of European Carmakers said on Wednesday.
That completed a near 10 percent decline for the first quarter that has prompted industry bosses 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 France's Peugeot was among March's biggest casualties, with a further 16.3 percent sales slump it can ill afford, European No. 1 Volkswagen AG posted a 15 percent year-on-year decline for its namesake brand 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 to clients 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.
Ford emphasized an increase in consumer market share as it reins in loss-making fleet sales to businesses, but said the euro zone's worsening conditions and unemployment were a serious concern.
"There was a lot of hope that the second half would start to see some gradual improvement," Ford of Europe President Stephen Odell told Reuters Insider TV on Wednesday.
"But with unemployment at 12 million in the euro area, it doesn't feel like we're going to see that just for a while."
Asked whether Ford was considering more cutbacks, Odell said the U.S. carmaker had "nothing new to announce" at this stage.
Daimler AG has also cautioned it may have to trim profit expectations, even after its Mercedes-Benz cars have gained on BMW and VW's Audi so far this year.
Mercedes sales bucked the market 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. Chief Executive Sergio Marchionne has warned that its loss-making European operations, may be further weakened by a drawn-out slump.
Fiat and Peugeot have been among the carmakers most exposed to a demand collapse that began in recession-hit southern Europe and is now gaining a firmer hold in Germany and other countries in the region's more prosperous north.
Toyota's 16.6 percent registrations decline in March compared with a year ago was worsened by a bigger drop in sales of its upmarket Lexus models.
With no end to the decline 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 a statement.