Honda Motor Co <7267.T> raised its annual forecast on Wednesday after cost-cuts boosted quarterly profit and said it was concerned that rival Toyota's <7203.T> huge safety recall might tarnish other Japanese brands.

Toyota, the world's largest automaker, continued to wrestle with the recall that was prompted by complaints over sticking accelerator pedals, losing U.S. sales and struggling to repair its reputation.

It suffered a sharp drop in U.S. sales last month as the recall and unprecedented sales halt allowed rivals to grab market share.

Honda, although not a beneficiary of Toyota's woes in January, raised its forecast for the year to March after cost cutting contributed to the strongest quarterly profit in a year-and-a-half.

A Honda executive expressed concern that fallout from Toyota's crisis might spill over to other car makers.

Toyota is the front-runner representing Japanese cars, Honda Executive Vice President Koichi Kondo told reporters. In that sense, we're somewhat worried that there may be a knock-on effect on other Japanese brands, but we'll need a little more time to gauge any impact.

Unlike rivals General Motors , Hyundai Motors <005380.KS> and Ford Motor Co , Honda has not taken aim at Toyota customers.

In the latest blow to its once gold-plated quality image, Toyota said on Wednesday dealers in both the United States and Japan had reported complaints from buyers over the brakes in its new model Prius hybrid.

Toyota has received 77 reports of consumer complaints about the braking issue through dealers in Japan, as well as eight in North America, including one in Canada.

The carmaker has not had any reports of problems in Europe, a Toyota Motor Europe spokeswoman told Reuters.

Toyota pulled eight of its most popular models including the Camry, Corolla and Rav4 from U.S. showrooms in the last week of January following complaints over sticking accelerator pedals.

Toyota's monthly sales fell 16 percent and its U.S. market share fell to its lowest level since January 2006 as rivals Ford Motor Co and General Motors Corp surged past. Its monthly U.S. sales dropped below 100,000 vehicles for the first time in more than a decade.

Auto sales and market share is kind of like a high-speed road race and if you get caught up in the gravel on the shoulder you can get passed really fast, and essentially that is what happened to Toyota, Autoconomy analyst Erich Merkle said.

Right now we have to find out how long it is going to take them to get back on pavement again, Merkle said.

As Toyota sales fell, Ford and Hyundai Motor Co <005380.KS> emerged as the big winners, each posting 34.8 percent sales gains. Honda's adjusted sales rose 2.9 percent.

Separately on Wednesday, Toyota's German rival Volkswagen said it saw a positive mid-term margin of 3-4 percent in the U.S., and 5-6 percent in the long-term.

Volkswagen had on Tuesday set out targets to dethrone Toyota as the world's top carmaker.

Volkswagen's total vehicle sales in the U.S. rose an adjusted 53.2 percent in January.

MORE SCRUTINY

Toyota is battling two problems - accelerator pedals that get stuck on floor mats and pedals that jam in the open position by themselves. The U.S. National Highway Traffic Safety Administration (NHTSA) has said five people have died in two separate accidents in the United States because of Toyota accelerator pedals becoming stuck on floor mats. It is not aware of any deaths or injuries linked to the second problem.

U.S. Transportation Secretary Ray LaHood took a harder line with Toyota for what he said was a slow response to safety complaints.

We're not finished with Toyota, LaHood said in an emailed statement to Reuters.

U.S. government officials said Toyota could face both an unusual civil penalty because of the recall and an expanded probe that would focus on electric controls. Either development could further damage the Japanese automaker's reputation.

On top of a separate recall for slipping floormats linked to unintended acceleration, some 8.1 million Toyota vehicles are now being recalled, more than its total group sales last year.

Regarding the Prius, a Toyota spokeswoman said the company was investigating several dozen complaints since December over what drivers characterized as insufficient braking when driving over bumpy or frozen roads.

CRISIS MANAGEMENT

The problems have raised questions about the handling of the crisis by Toyota executives, led by president and founding family member Akio Toyoda.[ID:nSGE6120HS]

Toyota will have a further opportunity to address the issue at its third-quarter results, due on Thursday.

Honda, the first Japanese automaker to post third-quarter earnings, raised its full-year operating profit forecast to 320 billion yen, a third above consensus forecasts.

Shares in Honda ended 2.3 percent higher on Wednesday ahead of the results, while Toyota closed down 5.7 percent at its lowest in more than two months. Turnover was three times its daily average.

The stock has fallen in eight of the past nine sessions and lost more than $25 billion in value since its initial U.S. accelerator pedal recall on January 21.

(Additional reporting by Kevin Krolicki, Soyoung Kim and Bernie Woodall in Detroit, Taiga Uranaka in Tokyo, Saeed Azhar in Singapore and Helen Massy-Beresford in Paris; Writing by Lincoln Feast; Editing by Jean Yoon and Erica Billingham)

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