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* Weak market could relax government opposition to cuts-PSA
* Morgan Stanley analysts cut 2013 EU car demand forecast
* Carmakers pin hopes on higher-margin sports cars, SUVs
By Laurence Frost
GENEVA, March 5 (Reuters) - Europe's ailing car market has weakened further in recent months; and with no signs of recovery, some industry leaders hope governments will relax their opposition to plant closures and job cuts needed to restore profits.
At the Geneva car show on Tuesday, executives from top players including Ford, Fiat, Daimler and Renault warned that demand in Europe would stay weak for years as governments drive through austerity measures.
"The European market is not in a condition we expected three months ago," said Dieter Zetsche, chief executive of German luxury carmaker Daimler, reflecting the industry's dismay at a continued plunge in sales in the region.
"The sustained nature of the European market slump is becoming pretty clear, and nobody now expects a return to (pre-crisis) levels on any visible horizon," said Guillaume Faury, strategy chief at France's PSA Peugeot Citroen.
"So there's going to be a kind of reckoning on European production levels for the next five years, leading governments to change their posture and encourage restructuring rather than oppose it," he predicted.
New car sales in the 27-member European Union dropped 8.2 percent to a 17-year low in 2012 as consumer incomes were squeezed by rising prices, subdued wages and austerity measures.
And hopes of a recovery this year have so far proved misplaced, with new car registrations in Germany, previously a bastion of stability, down more than 10 percent in February on a year ago, while sales in France and Italy fell by about 12 percent and 17 percent respectively.
"I don't think any government in Europe will let a car manufacturer fail (just as) the U.S. didn't," Renault's chief executive Carlos Ghosn told reporters.
"GM and Chrysler were saved by the tremendous support of the U.S. government for the same reason that anybody would do it in Europe, which is to save jobs. Nobody on the right or the left is going to allow all those jobs to go."
Carmakers have been battling to cut European production, while also focusing on recovering demand in the United States and robust growth in Asia, as well as pockets of outperformance such as sports utility vehicles (SUVs) and high-end cars.
But their European restructuring efforts have often met with opposition from governments worried about rising unemployment.
"I think there's a realisation that a long-term slump needs long-term measures. We're already seeing the first signs of this in France, where the need for restructuring has been understood and accepted," Faury said, adding that the deterioration in the German market could lead to a similar change in stance there.
But Fiat and Chrysler's chief executive Sergio Marchionne fears that politics will interfere with any attempt to cut excess production capacity in Europe.
"I think there's less than a 50 percent chance you'll see a structural failure in Europe," he told reporters in Geneva.
"I think you'll see state intervention before that. I've tried to argue against it, unsuccessfully. We've seen it happen in 2008, 2009. Its a stop-gap measure in violation of EC rules and creates an unlevel playing field."
Stephen Odell, head of Ford's European business, expects the European car market to continue "running along the bottom" of the U.S. carmaker's forecasts in the first half of this year and said that he had little confidence in a quick recovery.
"Frankly, who knows what happens in the second half," he said, adding that it could take four or five years for the European market to recover to the 17 million to 18 million vehicle sales range seen in 2007, before the global financial crisis.
German premium carmaker BMW similarly warned of a long haul to recovery.
"We believe that the underlying problem in Europe, which is mainly about debt, will persist for at least five more years," chief executive Norbert Reithofer said.
Morgan Stanley analysts on Tuesday cut their forecast for EU car demand this year to a decline of 6 percent from a drop of 4 percent previously. They said weakness in southern European markets such as Spain and Italy was spreading.
Business surveys showed France, Spain and Italy dragged the euro zone into a deeper downturn in February.
Duncan Aldred, sales chief of General Motors' Opel brand, said on Monday that European car sales could drop as much as 10 percent this year.
However, other carmakers remained reluctant to cut their estimates so early in the year.
Italy's Fiat, for example, said it would stick to its forecasts, though CEO Marchionne sounded downbeat.
"I don't see any glimmer of hope this year," he said, referring to prospects for a European market recovery.
Fiat, like many rivals, is aiming to tap strong growth globally at the premium end of the market. It is also looking at possibly creating a new low-cost brand.
The Italian carmaker said it would start selling its Alfa Romeo 4C two-seater model in Europe at the end of September with a launch price of 60,000 euros ($78,000) in a bid to stoke interest in the upmarket brand. A U.S. launch would follow shortly afterwards, it added.
Ford aims to bring its EcoSport compact SUV to Europe later this year, while BMW said it was optimistic that demand for premium cars from the United States and China in particular would continue to outweigh weakness in Europe.
"We're cautiously optimistic for this year," BMW's Reithofer said, forecasting a 2 percent rise in the U.S. market and 8.5 percent growth in China versus a 2 percent drop in Europe.