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UPDATE 2-Electric cars win? Britain to ban new petrol and diesel cars from 2040

2040@

* Britain says long goodbye to internal combustion engine

* Electric cars win on air pollution concerns

* Proposed ban follows similar French announcement

* Diesel cars blamed for poor air quality, respiratory disease

* GRAPHIC: Electric vehicles on the rise http://tmsnrt.rs/2eNwQoZ (Adds detail, background)

LONDON, July 26 (Reuters) - Britain will ban the sale of new petrol and diesel cars from 2040 in an attempt to reduce air pollution that could herald the end of over a century of popular use of the fossil fuel-guzzling internal combustion engine.

Britain's step, which follows France, amounts to a victory for electric cars that could eventually transform the wealth of major oil producers, car industry employment and one of the icons of 20th Century capitalism: the automobile itself.

The mayors of Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centres by 2025, while the French government also aims to end the sale of new gasoline and diesel vehicles by 2040.

The British government has been under pressure to take steps to reduce air pollution after losing legal cases brought by campaign groups, and in May set out proposals for a scrappage scheme to get rid of the most polluting vehicles.

"Today we are confirming that that means there should be no new diesel or petrol vehicles by 2040," environment minister Michael Gove told BBC Radio.

Prime Minister Theresa May's Conservatives had pledged to make "almost every car and van" zero-emission by 2050. The Times newspaper said the supply of hybrid vehicles which have both an electric and petrol or diesel engine would also end.

There is a mountain to climb, however.

Electric cars currently account for less than 5 percent of new car registrations in Britain, with drivers concerned about the cost and limited availability of charging points and manufacturers worried about making expensive investments before the demand is there.

"We could undermine the UKs successful automotive sector if we dont allow enough time for the industry to adjust," warned Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders (SMMT).

THE FUTURE IS ELECTRIC?

While many automakers may find it hard to countenance the end of the combustion engine, some have embraced a future where electric vehicles, or perhaps even driverless vehicles, ultimately win the race.

Earlier this month, Volvo became the first major traditional automaker to set a date for phasing out vehicles powered solely by the internal combustion engine by saying all its car models launched after 2019 would be electric or hybrids.

Renault-Nissan in 2009 announced plans to spend 4 billion euros on electric car development.

But until Volkswagen admitted in 2015 to cheating on U.S. diesel emissions tests, most mainstream auto manufacturers had been slow to sink serious investment into battery cars.

The backlash against diesel, without which carmakers would struggle to meet CO2 targets, has since refocused minds and produced a flurry of new commitments.

Volkswagen (VW) itself unveiled ambitious plans last year to roll out 30 new battery-powered models that it expects to account for 2-3 million annual sales by 2025 - or as much as 25 percent of its vehicle production.

Toyota, which pioneered gasoline-electric hybrids but had long resisted battery-only cars, changed tack last year and has since unveiled plans for a new range of pure-electric models.

In Europe, so called 'green cars' benefit from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions.

China, struggling with catastrophic pollution levels in major cities, is pushing plug-in vehicles, though in the United States there is much less appetite so far.

Germany, the home of major carmakers such as VW, Daimler and BMW, should soon start phasing out petrol and diesel too, said Oliver Wittke, a transport expert in Chancellor Angela Merkel's Christian Democrats (CDU).

But there is likely to be resistance in Europe's biggest car market. More than 600,000 jobs could be at risk in Germany from a potential ban on combustion engine cars by 2030, the Ifo economic institute said earlier this month in a study commissioned by Germany's VDA car industry lobby.

Germany's three major carmakers have also invested heavily in diesel technology, which offers more efficient fuel burn and lower carbon dioxide emissions than gasoline-powered cars.

In response to the British decision, a German government spokeswoman said on Wednesday Merkel had repeatedly warned against "demonising" diesel vehicles.

END OF OIL?

Yet Britain's move will accelerate the decline of diesel cars, whose nitrogen oxide emissions have been blamed for causing respiratory diseases, in Europe's second biggest market.

Gove also said the government would make 200 million pounds ($260 million) available to local authorities shortly for schemes to restrict diesel vehicles' access to polluted roads.

He said he favoured road-by-road restrictions for diesel vehicles rather than outright bans from town centres or costly vehicle scrappage schemes, but did not rule them out entirely if they were local authorities' preferred options.

London mayor Sadiq Khan, of the opposition Labour Party, said the government's commitment was half-hearted and steps needed to be taken before 2040 to tackle air pollution.

"We need a fully-funded diesel scrappage fund now to get polluting vehicles off our streets immediately, as well as new powers so that cities across the UK can take the action needed to clean up our air," Khan said in a statement.

Turning away from oil will add to discussions about whether the world is reaching peak oil demand and how additional electric power can be generated.

Some companies, including Royal Dutch Shell, expect demand to peak as early as by the end of the next decade.

Demand for diesel cars fell 10 percent in the first half of the year in Britain while sales of petrol vehicles rose 5 percent, according to industry data.

Sales of electric and hybrid models rose by nearly 30 percent in the same period, the fastest growing section of the market albeit from a low base.

($1 = 0.7677 pounds)

(Additional reporting by David Milliken and Estelle Shirbon in London and Laurence Frost in Paris, Editing by Guy Faulconbridge and Mark Potter)