* VW launches Virtus compact sedan in Brazil on Thursday
* New Brazil car shows post-dieselgate decentralisation push
* VW to outgrow rivals Fiat, Chevrolet in 2018-23 -IHS
BERLIN, Nov 16 (Reuters) - Volkswagen launches its new Virtus model on Thursday to tap Brazil's highest-volume segment as part of a recovery plan that analysts said will help it regain ground on rivals General Motors and Fiat in South America's largest car market.
Returning to profit in markets such as Brazil, the United States and Russia is vital for Volkswagen as it pushes to revive the core VW brand that accounted for more than half the group's 7.8 million auto sales in the first nine months but only 19 percent of underlying profit.
To tap rebounding demand in price-sensitive Brazil, VW will on Thursday unveil the "Virtus" compact sedan in Sao Paulo, the carmaker said, after starting deliveries in the country of the redesigned Polo subcompact, one of its all-time bestsellers, and a roomier, bigger Up! minicar.
The world's biggest automaker last week announced 560 million euros ($660 million) of spending in Argentina to build the first sport-utility vehicle (SUV) in Brazil's neighbour. It aims to launch 20 new models in South America by 2020 when it wants to be profitable again in the region.
"Renewing our product portfolio in Brazil is absolutely essential," VW brand chief executive Herbert Diess told a conference in Berlin on Nov. 9.
VW, which slashed about 7,000 jobs in South America in past years and shrunk its dealer network, wants to reduce the average age of the brand's Brazilian lineup to less than five years by 2020 from eight years in 2015, Diess said.
Brazil was one of the world's five biggest auto markets until the 2014-16 downturn and remains a major base of operations for Fiat Chrysler Automobiles NV, GM , VW and Ford.
Analysts said VW had been slow in the past few years to refresh models in Brazil and commanded slightly higher prices than mainstream peers which overhauled lineups in the passenger-car heavy Brazilian market more quickly.
"It's not unrealistic to say that VW had not been refreshing things very quickly," said IHS Markit analyst Stephanie Brinley. Price premiums "are difficult to translate into a (Brazilian) market that doesn't have capacity for a higher price at all."
To cut costs and be able to lower prices, VW fully developed the Virtus in Brazil, giving proof of its post-dieselgate strategy to cede more power from its Wolfsburg headquarters to regions and brands.
VW admitted in September 2015 that it had used illegal software to cheat U.S. diesel emissions tests, sparking the biggest business crisis in its 80-year history and saddling it with a $30 billion bill.
The new four-door model, to be built at Anchieta, VW's first-ever plant outside Germany, is one of the first cars to be spawned from a new localised version of the MQB modular platform that underpins most of the VW group's small and medium front-wheel-drive models.
Market research firm IHS expects VW's new models to help narrow the sales gap with market leaders Chevrolet and Fiat.
VW brand sales of passenger cars and light commercial vehicles in Brazil may jump 44 percent to 413,776 units by 2023 from an estimated 286,745 next year, IHS said.
By comparison, IHS expects sales of Fiat to grow only 26 percent to 475,686 cars while it sees sales of Chevrolet rising 18 percent to 444,744 models.
"Brazil may not be the highest-margin market but it's a huge market with vast potential for VW," said NordLB analyst Frank Schwope who has a "Buy" rating on the stock. ($1 = 0.8487 euros) (Reporting by Andreas Cremer; Editing by Adrian Croft)