Auto sales plunge as credit crunch hits

But the September sales result was far weaker than expected with overall sales dropping to an annual rate near 12.5 million vehicles, according to sales tracking firm Autodata Corp.

The drop in sales comes despite stepped-up discounting by automakers, a move that cuts into profit margins.

Edmunds.com, an industry tracking service for consumers, estimates that the discount on the average vehicle for September was $2,801, up 19 percent from a year earlier.

Sales for luxury German brands were also hammered. Sales for Daimler AG's Mercedes-Benz dropped 16 percent. BMW was off 30 percent; Porsche fell 45 percent.

"We're in a recession -- I keep saying that to people," Merkle said. "And this is how the issues we have in housing are spilling into the broader economy."

The weak sales underscore the risks for auto dealers, who are contending with dwindling sales, higher costs for inventory and increasing difficulty finding lenders for their customers.

The top U.S. auto dealership group AutoNation Inc said on Tuesday that car loan approval rates had dropped to about 60 percent from 90 percent a year ago.

Ford Motor Credit and Chrysler Financial, now owned along with Chrysler itself by Cerberus Capital Management, both were forced to raise the interest rates charged to dealers to finance inventory, executives said.

Advisory firm Grant Thornton said in a forecast released Wednesday that it expected more U.S. car dealerships to close over the remainder of this year and into 2009.

Bill Heard Enterprises Inc, one of the biggest General Motors Chevrolet dealerships, filed for bankruptcy protection on Sunday, citing losses, decreased demand and lack of credit.

At its peak, annual revenue for the Alabama-based retailer was about $2.5 billion, according to the bankruptcy filing.

(Additional reporting by David Bailey and Poornima Gupta in Detroit, editing by Gerald E. McCormick and Bernard Orr)