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* VW 2014 China group sales may exceed 3.5 mln cars -CEO
* VW electric Up, Golf models to kick off sales in 2014
* VW to boost Chinese dealerships 50 percent to 3,600 in 2018 (Adds detail on electric-car plans, CEO comment and background)
By Jan Schwartz and Andreas Cremer
BEIJING, April 19 (Reuters) - Volkswagen will keep expanding Chinese operations and start selling battery-powered cars in the biggest auto market as the country rewards electric-vehicle buyers to tackle air pollution.
VW said on Saturday it will add capacity in its top market, the destination of over a third of its 2.4 million first-quarter group deliveries, as economic stimulus measures and demand in China's interior regions fuel sales.
VW group deliveries may increase to over 3.5 million cars this year, a record, from 3.27 million in 2013, Chief Executive Martin Winterkorn said at a company event.
The German group, one of the first global automakers to establish production facilities in China during the 1980s, will push its environmental credentials as China moves to upgrade the economy and shift the focus away from heavy industry.
The government announced in February a 10 billion yuan ($1.61 billion) fund to help change the way it produces and consumes energy. It aims to promote green and low-carbon technology to cut fossil fuel use and control coal consumption.
"Here in China, as elsewhere, people's expectations of mobility and the automobile are changing faster and faster," the VW CEO said.
Europe's biggest carmaker, which also sells the high-performance Lamborghini and Bentley brands in China, is a late starter in terms of making environmentally-friendly cars there.
Rival Daimler and Chinese partner BYD Co. plan to start selling their Denza electric vehicle this year while hybrid vehicle champion Toyota unveiled the Yundon-Showanchin II hybrid model last year, specifically developed for China.
VW plans to start selling electric versions of the Up city-car and the Golf hatchback this year, followed by plug-in hybrid versions of the Audi A3 compact and Golf GTE in 2015, according to VW.
Plug-in hybrids can travel longer distances on battery power than ordinary hybrids and can be recharged at public charging stations. VW also said it plans to develop and build plug-in versions of Audi's A6 model and a new, mid-sized saloon with its two Chinese partners.
"Here in China we are now setting out on the road to a future of emission-free mobility," Winterkorn said.
VW, which has over a dozen factories in China, plans to expand its distribution network by half to 3,600 dealers by 2018 from 2,400 last year, Jochem Heizmann, the head of VW's China operations, said at a briefing.
The carmaker's two joint venture partners, First Automotive Works and Shanghai Volkswagen, are planning to spend 18.2 billion euros through 2018, the year VW has pledged to take the global car-sales crown, on models, technologies and plants. ($1 = 6.2190 Chinese Yuan) (Reporting by Jan Schwartz in Beijing. Writing by Andreas Cremer in Berlin; Editing by Rosalind Russell)