* Spanish car sales rise 18 percent, French up 14.1 pct

* U.S. sales seen sharply lower after subsidies end

* Japanese car sales increase 3.5 percent

Government funds propped up an ailing European auto industry in September, in contrast to an expected slump in sales in the United States after its cash for clunkers scheme ran out of money.

French and Spanish car sales rose sharply, data showed on Thursday, underpinned by subsidies offered for purchases of new cars and extending a positive trend from Asia.

But in Belgium and Sweden, where no such scrappage systems exist, September sales were down, and U.S. data due later on Thursday was forecast to show a return to the nearly three-decade lows of early 2009, reflecting the expiry of a months-long subsidy scheme.

In France, where sales were up 14.1 percent, scrappage benefited carmakers with entry-level or compact models, which account for every second car sold, said a spokesman for carmakers association CCFA.

Xerfi analyst Guillaume Mouren said in a note the year-on-year rise was all the more remarkable given that sales in September 2008 fell only slightly from the previous year.

Mouren said he expected the French car market to grow 5 percent this year. But, given that an end of the growth in unemployment is not yet on the horizon, and inflation is going to make its presence felt once more in the coming months, French consumers won't be able to (support) ... the automobile sector indefinitely.

Sales figures from Italy were also due out on Thursday, after September car sales in Japan, home to the world's largest automaker Toyota Motor Corp (7203.T), rose 3.5 percent, excluding 660cc minivehicles.

In Spain, where the government started offering 2,000 euro ($2,914) subsidies in May, sales were up 18 percent, carmakers' association ANFAC said.

While the comparative performance in Spain for September 2008 was very weak, Credit Suisse analyst Stuart Pearson believes underlying demand may be starting to recover.

Consumer confidence has started to stabilise. There probably are more people more secure in their jobs and willing to upgrade their cars, he said.

U.S. WOES

In the United States, no major manufacturers are expected to post sales gains in September, and auto exchange website Edmunds has forecast a 23 percent industry sales decline.

But the picture for the coming year looks less gloomy, according to Credit Suisse's Pearson. The real question is what will happen to demand in the U.S. in 2010 and I think the outlook for that is still pretty positive, he said.

For September, Edmunds expects Ford Motor Co (F.N) to post a 9.7 percent sales drop, GM a 46.1 percent drop and Chrysler a 48.7 percent decline.

GM said on Wednesday it would close Saturn and wind down its dealership network after a deal to sell the faltering brand to Penske Automotive Group (PAG.N) collapsed.

Among Japanese carmakers, Edmunds expects Toyota Motor Corp (7203.T) to post a 9.7 percent sales decline in the United States, Honda Motor Co Ltd (7267.T) to drop 8.3 percent and Nissan Motor Co Ltd (7201.T) 1.1 percent.

Takanobu Ito, chief executive of Japan's no.2 carmaker Honda told Reuters on Thursday the company was forecasting only a very modest profit this year, lamenting the dollar's fall below 90 yen this week.

South Korean automakers showed mixed figures, with a 39 percent fall for Ssangyong Motor (003620.KS), while Hyundai Motor (005380.KS) sales soared 61 percent and Kia Motors (000270.KS) 69 percent.

EXTENDING INCENTIVES

Back in Europe, Italian prime minister Silvio Berlusconi said on Wednesday his government was ready to extend scrappage incentives beyond the end of 2009 if necessary.

Fiat (FIA.MI) Chief Executive Sergio Marchionne, who on Wednesday predicted Italian sales would fall more than 6 percent in 2009, said Berlusconi's stance was encouraging.

He added that he was ready ... to find a solution for incentives in 2010 and 2011. Marchionne had previously said he favoured phasing out incentives over two years.

September sales figures for Europe's largest car market Germany, where scrappage subsidies ended on Sept. 2, are expected on Friday.

Volkswagen's (VOWG.DE) Czech unit, Skoda Auto, said on Thursday it may halt production for two days in October as sales had fallen after the German funds ran out. [ID:nL1481924] Europe-wide car sales for September are due on October 15.

For a FACTBOX ranking the world's top ten automakers by H1 sales click on [ID:nT43743]

(Additional Reporting by Shin Jieun, Chang-Ran Kim, Yoshifumi Takemoto, Yumiko Nishitani, Gilles Guillaume, Simon Johnson and Stefano Bernabei; editing by John Stonestreet)

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