U.S. auto sales stalled in February as a safety crisis sent Toyota Motor Corp <7203.T> reeling, allowing Ford Motor Co to leap into the industry's top spot for the first time since 1998.

To battle the fall-off in its sales, Toyota said on Tuesday that it would attempt to win back consumers with unprecedented discounts including zero-percent financing for five years on top-selling models like the Camry.

Industry-wide sales for February held flat from the depressed sales rate of 2009, bucking expectations for a gradual recovery for a battered industry.

The weak auto figures add to concerns that the economy's recovery from the worst downturn since 1930s could stumble in the second half of the year if spending remains lackluster. Consumer spending is considered key to recovery because it accounts for roughly two-thirds of economic activity.

But major automakers blamed winter storms and the Toyota safety crisis for keeping shoppers from showrooms, saying they expected the industry would make up for lost ground over the remainder of the year.

Toyota's U.S. sales dropped almost 9 percent in February from an already-low level a year earlier in the depths of the economic crisis.

The decline was led by a drop of nearly 20 percent for Toyota's top-selling Camry sedan.

By contrast, Ford's U.S. sales rose 43 percent, powered by gains for the Fusion, a Camry competitor that saw sales more than double from a year earlier.

Ford sales chief Ken Czubay said the Fusion was winning new customers for Ford in six out of ten cases, calling the mid-size sedan the poster child for the automaker's strategy of taking business without being pulled into a price war.

General Motors Co posted a sales gain of nearly 12 percent, but was hurt by short inventory of hot-selling newer models like the Chevrolet Equinox.

GM said it would offer a range of zero-percent financing offers on 2009 and 2010 vehicles and announced an executive shake-up that centers responsibility for delivering a promised sales turnaround on North American president Mark Reuss.

Jack Nerad, an analyst at Kelley Blue Book, said GM's results showed the automaker was still struggling from a post-bankruptcy syndrome.

A percentage of the American buying public has been turned off by GM's bailout, he said in a note. The fact that Ford is a major beneficiary of Toyota's safety recalls is another factor in this complex mix.

Toyota's major competitors gained ground. Nissan Motor Co <7201.T> sales were up 29 percent; Honda Motor Co <7267.T> reported a 12 percent sales gain.

Hyundai Motor <005380.KS> saw sales increase 11 percent, marking the 14th consecutive month the Korean automaker has gained market share in the United States.

Even Chrysler, considered the weakest of the major automakers because of its lack of new vehicles, outperformed Toyota with a flat sales result for February from a year earlier. It was the first time since December 2007 that it did not experience a drop in monthly sales.

Industry-wide U.S. sales for February were 10.38 million vehicles on the annualized and adjusted basis tracked by analysts, according to industry watcher Autodata.

That rate is down from a 10.8 million sales rate in January and represents a setback at a time when major automakers have forecast a continued gradual recovery in 2010 after a crushing-three year decline. Sales dropped to 10.4 million units in 2009, the worst performance in 27 years.

I wouldn't read too much into the month as we look at the full year, said Paul Ballew, economist with Nationwide Mutual Insurance Co and former GM sales analyst. It was an awful month for weather.

Other economists agreed that the February chill that hit auto sales would likely be short-lived for other sectors of the economy.

A run of bad economic news in the coming weeks will be nothing more than a short-lived statistical blizzard. This means that the net effect on first-quarter GDP growth is likely to be negligible, said Paul Dales, a U.S. economist at Capital Economics in Toronto.

FOCUS ON INCENTIVES

In addition to its financing incentives, Toyota will offer attractive leasing terms and free maintenance for two years for returning Toyota customers as a thank-you to our customers for sticking with us, said Bob Carter, who heads sales operations for the Toyota brand in North America.

Barclays Capital analyst Brian Johnson said Toyota's discounting raised the pressure on its rivals to offer their own competitive discounting.

These expensive programs should represent a material step up in cost of incentives, Johnson said in a note for clients.

He estimated that it would cost Toyota almost $4,700 per vehicle to offer zero-percent financing for five years, an effective discount that almost triples what the automaker had been spending on incentives.

Ford vowed not to be drawn into a price war, although executives said that the still-unsteady pace of economic recovery made pricing a more important factor for consumers.

The battlefield is strewn with a lot of competitors who have fallen to over-merchandising, Czubay said. We will continue to let our products do the talking.

The sales results came as Toyota faced a third congressional grilling over its safety crisis.

The U.S. Senate Commerce Committee opened a day of hearings on Toyota's recent recalls for acceleration problems on Tuesday with another rebuke for the world's top automaker.

Senator John Rockefeller, a Democrat from West Virginia who chairs the committee, said Toyota had let concern for profits trump decision-making on safety while U.S. regulators had failed to move aggressively in their investigation of cases of unintended acceleration.

We are all here today because we know that something has gone terribly wrong -- the system meant to safeguard against faulty vehicles has failed and it needs to be fixed immediately, Rockefeller said.

Toyota has recalled some 8.5 million vehicles globally for safety problems centered on the risk that accelerator pedals could become stuck in the open position because of a loose floor mat or a glitch in the accelerator assembly.

The safety crisis has damaged Toyota's reputation and kept dealers from selling some models in inventory through early February until fixes could be made.

Unintended acceleration in Toyota and Lexus vehicles has been linked to at least five U.S. crash deaths since 2007.

Authorities are investigating 47 other crash deaths over the past decade linked to complaints of alleged unintended acceleration in Toyota vehicles.

(Additional reporting by Bernie Woodall in Detroit and Lucia Mutikani in Washington, writing by Kevin Krolicki, editing by Matthew Lewis)

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