UPDATE 1-Car rental firm Hertz is latest victim of auto recalls

(Adds analyst comment, background; updates shares)

Aug 20 (Reuters) - While an improving U.S. economy has helped rev up demand for car rentals, the rental companies have found themselves short of vehicles due to the slew of recalls by car manufacturers this year.

The latest casualty was Hertz Global Holdings Inc, whose stock slumped 13 percent on Wednesday after the company withdrew its full-year financial forecast, blaming a shortage of cars due to the recalls and costs associated with an accounting error.

"...They weren't able to get the benefit of a strengthening market because they simply didn't have the cars," Michael Millman of Millman Research Associates told Reuters.

Millman said the shortage was compounded by the fact that Hertz has a lot of contracted business that get first call on available cars.

Hertz, Avis Budget Group Inc and market leader Enterprise Rent-A-Car control about 90 percent of the U.S. car rental market.

The recalls have hurt business. And more so Hertz, than Avis, since cars are made by General Motors Co account for a bigger portion of its fleet.

GM cars comprise nearly 28 percent of Hertz's U.S. fleet compared with 19 percent for Avis. GM, the No.1 U.S. automaker, has recalled millions of cars this year, most notably for a deadly ignition-switch flaw.

"Record levels of vehicle recalls hit Hertz harder than peer Avis Budget," MKM Partners managing director Christopher Agnew wrote in a note.

Avis had nearly 125,000 cars, or about one-third of its fleet, recalled till July 31 and has said costs associated with the recalls were expected to affect current-quarter results.

"Some cars have been grounded for literally months because of an inability to get parts," Avis Chief Executive Ron Nelson said in a post-earnings conference call earlier this month.

Hertz on Tuesday said it expects 2014 results to be "well below" its previous forecast due to the recalls and costs related to correcting financial results to fix accounting errors originating in 2011. (http://1.usa.gov/YwpVmG)

"The filing contained a bundle of bad news that we believe will be the point of capitulation for many of the frustrated bulls who have been extremely patient with Hertz until this point," J.P. Morgan analyst Kevin Milota wrote in a note.

The brokerage cut its rating on the stock to "neutral" from "overweight" and its target price by $7 to $25.

Deutsche Bank downgraded the stock to "hold" from "buy".

Hertz's shares were down nearly 10 percent at $28.44, while Avis was slightly lower at $68.72 in afternoon trading.

Up to Tuesday's close, Hertz's stock had gained 18 percent this year, while Avis had gained 70 percent.

(Additional reporting by Ankit Ajmera in Bangalore; Editing by Savio D'Souza)