Toyota Motor Corp (7203.T) expects industry auto sales in Europe to remain flat or decline further in 2010, from 2009, as government incentive programs cease to inflate sales, the head of the automaker's European operations said on Monday.

Toyota Europe President Tadashi Arashima said vehicle sales in the region have been distorted by programs that give drivers cash bonuses to trade in older models for newer, greener cars. Natural demand remained pretty bad, he said.

The question is how soon demand will come back, Arashima told reporters at a briefing ahead of the Frankfurt Motor Show. We're not optimistic at all.

In Germany, Europe's biggest car market, registrations leapt 28 percent in August but an incentive scheme that paid drivers 2,500 euros to scrap older cars has run out. France has promised to keep its scheme running into 2011.

Incentive schemes elsewhere in Europe and the United States have also helped spur demand for new cars but have raised concerns that markets will dry up once the stimulus ends.

Arashima said Toyota and other automakers are asking European governments to gradually phase out the programs in order to avoid an abrupt collapse in demand.

Stung by the recession and tight credit, industry-wide sales are estimated to drop 15 to 20 percent in Europe from about 20 million units last year, Arashima said. He forecast the market could drop further next year because the government incentives pulled ahead sales from future months.

Toyota will showcase the plug-in version of its top-selling Prius hybrid car and its first European-built hybrid car, the Auris hybrid hatchback, at the Frankfurt Motor Show that opens to the media on Tuesday.

While many markets in Europe - notably France - heavily favor diesel cars over hybrids, Toyota said in June it would alter its strategy in Europe to focus more on hybrid vehicles.

Takeshi Uchiyamada, Toyota executive vice president in charge of research and development, and environmental technologies, said government incentives would be necessary for hybrid vehicles to enter the mainstream market in Europe.

Partly spurred by big tax breaks, hybrids make up more than 10 percent of vehicle sales in Japan. In comparison, hybrids account for less than 2 percent of auto sales globally.

(Reporting by Soyoung Kim; Editing by Tim Dobbyn)

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