European new car sales will decline for the fifth year in a row in 2012 to 13 million vehicles, Fiat Chief Executive Sergio Marchionne said on Wednesday, as the group moved a step closer towards a full-blown merger with U.S. automaker Chrysler.

For 2012 the market expectations in Europe are not encouraging, Marchionne, who also runs Chrysler, told a shareholder meeting in Turin at which a share conversion that paves the way for Fiat's merger with the U.S. carmaker was approved.

His forecast compares with 13.1 million cars sold in Europe last year, and almost 16 million cars sold in 2007, before the start of the financial crisis, according to figures from lobby group ACEA.

The European car market is struggling in the face of dampened consumer spending power and fears over high oil prices, while automakers face cut-throat price competition that piles further pressure on their margins.

Marchionne had already given a gloomy outlook for Fiat's Italian home market, where 2012 sales are expected to fall to 1.5 million units after a horrible month of March - the worst since 1980.

He confirmed the combined group's profit targets for 2012, which are expressed in a range to take into account the weakness in Europe - which he said would only begin to recover at the end of the year.

The group expects net profit of between 1.2 billion and 1.5 billion euros for 2012, with revenues exceeding 77 billion euros, thanks to the ongoing strength of its U.S. and Latin American operations.

Car sales were seen at between 4.1 million and 4.4 million units in 2012, compared to 4 million sold in 2011.

Marchionne said the group expected to assess the impact of the European crisis on its business plan to 2014 when it releases third quarter results later this year.

NO RUSH TO MERGE

Fiat has been running Chrysler since a 2009 bailout deal backed by the U.S. government and now has a 58.5 percent stake in the no. 3 U.S. automaker.

The shareholder meeting approved the conversion of Fiat's preference and savings shares into ordinary shares, a move that simplifies the group's capital structure and makes it easier for Fiat to buy the 41.5 percent of Chrysler it does not yet own.

That stake is held by the U.S. union trust fund VEBA, which is looking to cash in on its holding, and the conversion means savings shareholders would not be able to block a tie-up.

When the conversion plan was first announced in October, Marchionne said it was done in preparation for a full-blown merger with Chrysler by 2014.

On Wednesday he said Fiat was in no rush to complete the merger and had still not decided whether to begin exercising this year an option to gradually buy 40 percent of the VEBA stake between July 2012 and 2016. If it does so, that would take its stake in Chrysler to 61.8 percent in 2012.

Marchionne defended his strategy of shifting the group's focus to the United States - which has become the main profit generator for the combined company - and to fast-growing Latin America.

This was the only way to preserve Fiat's future, he said. It does not make sense anymore to talk about Fiat as an Italian or European company... With Chrysler we have fixed our excessive dependence on Europe and have the tranquility to overcome the market's fluctuations.

Chrysler Group LLC reported a 34 percent increase in auto sales in March, the best monthly result in four years.

Marchionne said he expected Fiat's three core mass market brands, Fiat, Alfa Romeo and Lancia, to break even in 2014. Those brands lost around 500 million euros in 2011.

(Reporting by Silvia Aloisi; Editing by Helen Massy-Beresford)

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