UPDATE 2-Peugeot sales plunge on Europe slump

* PSA 2012 global sales plunge 16.5 pct

* Peugeot targets 2013 sales growth excluding CKD vehicles

* European market share down 0.5 points to 12.7 pct

PARIS, Jan 9 (Reuters) - PSA Peugeot Citroen's global car sales dropped 16.5 percent last year as the struggling French automaker recorded its worst European sales performance in years and withdrew from Iran.

Automakers have been battling a prolonged sales slump in Europe, where fallout from the euro zone crisis has hit consumer demand. Peugeot's sales outside the region have not increased fast enough to compensate.

The European car market is at its lowest in close to two decades and Peugeot's sales performance in the region in 2012 was the worst in at least the same period. The company forecast a further 3-5 percent decline for the market this year.

"If this view of the world should turn out correct, we see little reason why the financial situation at PSA should improve at all during the year," Credit Suisse analyst Erich Hauser said.

The group's global sales volume dropped to 2.97 million vehicles in 2012 from 3.55 million a year earlier, weighed down by a collapse in southern European demand, the company said in a statement on Wednesday.

"PSA Peugeot Citroen has felt the full force of the sustained decline in Europe's automobile markets," brands chief Frederic Saint-Geours said.

France, Spain, Italy and Portugal - the markets worst hit in Europe's sales slump - still account for more than half of Peugeot's regional business, according to company data.

Peugeot pledged to return its regional market share to 13 percent, after a 0.5-point slide to 12.7 percent last year.

The Paris-based company is shedding assets, cutting 10,000 jobs and closing production capacity to stem mounting losses. Chief Executive Philippe Varin has warned that it won't return to profit before 2015.

Sales in China, where the carmaker is adding production with a second joint venture, advanced 9.4 percent to 442,000 vehicles. China's auto market will expand 7-8 percent this year and Russia's about 5 percent, Saint Geours predicted.

Peugeot reiterated its goal of generating at least half of its sales outside Europe by 2015.

The global sales plunge was exacerbated by Peugeot's decision early last year to halt sales of so-called CKD car kits for final assembly in Iran, which wiped 313,000 vehicles from its total. This was a response to international sanctions restricting financial transactions with Iran.

Excluding Iran, Peugeot said it recorded a 8.8 percent global sales decline to 2.82 million vehicles last year. This exceeded an 8.7 percent decline in the 2008 financial crisis. It said on Wednesday it hoped to return to volume growth in 2013.

Saint Geours dismissed reports that the company was preparing a full or partial sale of 57.4 percent-owned auto parts subsidiary Faurecia.

"This is not on the agenda," Saint Geours said.

Full-year 2012 registrations to be published by the Brussels-based Association of European Automakers on Jan. 16 are expected to show regional auto sales at their lowest in about 20 years.

Peugeot shares were down 0.3 percent at 6.20 euros at 0905 GMT. The stock has fallen 44 percent over the past 12 months.