Toyota Motor Corp <7203.T>, the world's largest automaker, said it would halt a production line in Japan as it looks to cut excess capacity to return to profitability amid an industrywide sales slump.

Car plants around the world are idle or running below capacity as the industry copes with a slide in sales that sent General Motors Co and Chrysler Group LLC into bankruptcy and has Toyota headed for a record loss this year.

Total cuts could reach 700,000 cars, or 7 percent of Toyota's global capacity, including a production line in Britain that may be halted and a joint venture with General Motors in the U.S. likely to be closed, a source with knowledge of the matter said.

Though sales in some countries have been picking up, the outlook for global car demand is still uncertain, and the company thinks it should be prepared, the source said.

Toyota's sales have been boosted over the past few months by government incentives aimed at kick-starting demand, but it is still plagued by an excess capacity of more than 3 million vehicles following a rapid expansion earlier in the decade.

The company said it has decided to halt a production line in Japan for about a year and a half from next spring.

The production cut is positive for its earnings, but there is room for further capacity cuts in the United States and elsewhere, said Yoshifumi Tabei, an auto analyst at Kazaka Securities.

Shares of Toyota closed up 1.5 percent, in line with the benchmark Nikkei <.N225> average, which rose 1.4 percent.

Toyota expects to lower its break-even point by halting some assembly lines, but will not dispose of them so that it can quickly raise production in the event of a demand recovery. Workers on the halted Japanese production line will be employed at other Toyota factories.

The source said the extent and timing of the output cuts had not yet been set but the Nikkei business daily reported that Toyota planned to reduce its global capacity by 10 percent, or 1 million vehicles, as early as the current financial year to March 2010.

The source, who declined to be named because the matter was not public, said Toyota was also considering halting a line at a UK plant.

Toyota has said it will decide this month whether to pull out of New United Manufacturing Inc (NUMMI), a California joint venture with General Motors.

Those three moves would cut capacity by 700,000 vehicles, based on Toyota factory data, from Toyota's annual output capacity of 10 million vehicles.

Toyota has begun restoring some production cut in the wake of the global financial crisis as inventories shrink, but has yet to announce whether it plans longer-term cuts in factory capacity.

It has seen a recovery in sales of fuel-efficient cars helped by government measures to promote such vehicles, with its Prius hybrid ranking as Japan's top-selling car in July for the second straight month, but has lagged behind its rivals in cost-cutting.

Toyota booked an operating loss for the third straight quarter in April-June, while Honda Motor Co <7267.T> and Nissan Motor Co <7201.T> turned profitable during the period thanks to cost reduction measures including pulling out of some motor sports and cutting jobs.

The idling of plants had been a negative factor for Toyota, so the fact they're moving to tackle this should be evaluated favorably, said Yumi Nishimura, deputy general manager of the investment advisory section of Daiwa Securities SMBC.

Toyota forecast this month a slightly shallower annual loss, relying on deeper cost cuts and government-backed sales stimulus around the world, but there remain doubts about a sustainable recovery in demand.

(Additional reporting by Elaine Lies, Taiga Uranaka in Tokyo, Shradhha Sharma in BANGALORE; Editing by Chris Gallagher and Lincoln Feast)

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