UPDATE 2-Car sales fall in austerity-hit France, Italy, Spain

* French Sept car sales down 18 pct

* Spain sales down 37 pct, hit by tax increase, scrappage

* Italy car sales down 25.7 pct, German figures Tuesday

(Adds Italy car sales) By Laurence Frost and Jennifer Clark

PARIS/MILAN, Oct 1 (Reuters) - Car sales dropped further in austerity-hit France, Italy and Spain last month, and France's CCFA auto industry association cut its full-year market forecast, highlighting the pain for automakers that have warned there would be no imminent recovery.

French September car registrations dropped 18 percent year-on-year, while Spain's plunged 37 percent, the countries' main industry associations said on Monday. In Italy, car sales fell 25.7 percent in September, the transport ministry said.

The Spanish plunge was accentuated by a Sept. 1 sales-tax increase, which had brought forward some sales to August.

Would-be buyers also held out for renewed scrappage incentives introduced on Monday.

The September decline was nonetheless a "disappointing result", the ANFAC association said.

Scrapping incentives offer car buyers a bonus for trading in old cars for a new model. Previous schemes in countries such as France, Germany and Italy helped Europe's car market to withstand the last economic slump in 2008-2009.

European car executives gathered at the Paris auto show warned last week that a rebound may be years rather than months away.

Italy's dismal figures were the worst since a car-haulers' strike wreaked havoc back in March. In September, there was no strike to blame.

Automotive research group Centro Studi Promotor said sales could be stabilising, however, after data it collected showed slightly higher showroom traffic and an improvement in dealer confidence.

"We could rule out further declines, but don't feel authorized to talk about an imminent recovery," the group said.

Fiat Chief Executive Sergio Marchionne said much the same at the Paris auto show on Friday.

"We're scraping along at the bottom of the barrel now, bouncing along the bottom, like a submarine," he said. "We need to start seeing a pickup in consumer confidence before we know whether we're done scraping along the bottom."

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Europe car registrations by country: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> CUTTING FORECASTS

Announcing the French market's 11th straight monthly decline on Monday, the CCFA slashed its 2012 outlook to predict a 12 percent slump, instead of the 10 percent contraction previously forecast.

Renault had cut its own market forecasts on Sept. 26 to predict declines of 13 percent in France and 7-8 percent in Europe.

The French brand suffered some of last month's biggest declines, with sales dropping 36 percent at home and 51 percent in Spain. Ford sales also lost ground in both markets, tumbling 32 percent in France and 40 percent in Spain.

For the first nine months, the French car market recorded a 14 percent decline, Italy 20.5 percent, and Spain shrank 11 percent.

While PSA Peugeot Citroen's small cars suffered in the lull ahead of renewed Spanish incentives, the twin brands fared better at home.

Buoyed by accelerating sales of its new 208 subcompact, Peugeot's French registrations fell just 1 percent in September, resisting the market slump. Citroen dropped 10 percent.

Volkswagen , Europe's biggest automaker, fell in line with the French market and lost ground for its core VW brand in Spain, where sales fell 44 percent.

Fiat dropped 34 percent in France but just 13 percent in Spain, limiting the damage with an 82 percent gain in registrations of its Panda mini.

(Reporting by James Regan, Laurence Frost, Robert Hetz and Jennifer Clark; Editing by Helen Massy-Beresford)