UPDATE 1-Brazil auto output edges up in March from year ago

* Sales still lag from a year ago, but rebound from Feb

* Government extended tax breaks for industry last week

(Recasts with details of data, background for industry)

SAO PAULO, April 4 (Reuters) - Automobile production in Brazil rose slightly in March but sales continued to lag compared with a year earlier, underscoring a fragile market that prompted the government to extend tax breaks on car and truck sales through the end of the year.

Vehicle output edged up 3 percent from a year earlier and sales slipped 6 percent, the national automakers' association said on Thursday. Compared to a holiday-filled February, production rose 39 percent and sales climbed 21 percent.

In February, auto output fell 18 percent and sales dropped 25 percent.

Concerned that weak demand could hurt a sector making up a quarter of Brazil's industrial output, President Dilma Rousseff decided last week to extend expiring tax breaks for cars and trucks.

Economists have questioned whether the tax incentives are providing real economic stimulus or simply delaying an inevitable slowdown in an auto market that has doubled in six years to become the world's fourth largest.

Brazil's economy grew a mediocre 0.9 percent last year, hurt by uncompetitive industry, transportation bottlenecks and growing consumer debt - factors that have weighed on carmakers in the country.

Many of the world's biggest automakers have major operations in Brazil, including Italy's Fiat SpA, Germany's Volkswagen AG and U.S.-based General Motors Co and Ford Motor Co.

(Reporting by Alberto Alerigi Jr. and Brad Haynes; Editing by John Wallace)