UPDATE 2-Mazda China car sales plunge amid tensions over islands

* Island row taking toll on sales for Japan automakers

* Mazda down 35 pct in Sept but Audi up 20 pct

* Other Japan automakers have not released Sept figures yet

* Nissan and Toyota have curbed production

(Adds analyst's and company comments)

By Fang Yan and Fayen Wong BEIJING/SHANGHAI, Oct 4 (Reuters) - Mazda Motor Corp

said on Thursday its China sales tumbled 35 percent in September from a year earlier, the first concrete numbers to point to problems faced by Japanese automakers in the wake of a territorial row between the two countries.

Violent protests and calls for boycotts of Japanese products broke out across China in mid-September after Japan bought two of the East China Sea islands, known as the Diaoyu in Chinese and the Senkaku in Japanese, from their private owners.

The tensions, which came as the two countries marked the 40th anniversary of diplomatic relations, have started to affect a wide variety of Japanese firms, and have prompted some foreign investors to allocate funds away from Japan amid fears that a lasting reconciliation could be a long way off.

China's state-owned media have warned Japan that it could endure another "lost decade" of economic stagnation should Beijing resort to economic retaliation if the dispute festers.

Among other Japanese automakers, Nissan Motor Co and Toyota Motor Corp have been forced to curb production after arsonists badly damaged their stores in the eastern port city of Qingdao -- a situation that stands in sharp contrast to other foreign automakers that had been adding capacity until recently.

Mazda, which operates a three-way car venture in China with Ford Motor Co and Chongqing Changan Automobile Co Ltd , said it sold just 13,258 cars in the world's biggest auto market in September. In August, it sold 17,497 cars, a milder slide of 11 percent from a year earlier.

"(Japanese automakers) lost a lot of selling days ... There is no doubt that Mazda's sales setback was a result of this very complicated situation between China and Japan," said Yale Zhang, head of Shanghai-based consulting firm Automotive Foresight.

Naoto Oikawa, a Mazda spokesman based in Shanghai, said Mazda's sales in China have been contracting every month since April.

"I am sure there was some impact, but it's difficult to say how much of the sales slide we saw last month was due to anti-Japan protests," he said.

Other Japanese automakers have yet to release their September sales figures for China but other foreign brands are not feeling their pain. Volkswagen's premium brand Audi increased sales in China by 20 percent to 35,512 vehicles in September.

For the year to date, Mazda's sales are down 6 percent. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Funds retreat from Japan in China spat US call for 'cool heads' in island dispute Japan vows no compromise on islands row China-Japan spat derails free trade talks ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

China is Japan's largest trading partner. In 2011, their bilateral trade grew 14.3 percent in value to a record $345 billion. Exports to Japan, however, make up less than 10 percent of China's total.

Standard & Poor's warned this week that while Japanese firms' credit ratings were not likely to suffer much from the dispute at the moment, that could change.

"If the political confrontation drags on and further worsens ties between both countries, it may hurt Japan's macro economy and affect the credit quality of rated Japanese companies on a large scale," said Standard & Poor's credit analyst Naoko Nemoto.

Airlines have also suffered, with All Nippon Airways Co Ltd (ANA) saying that 40,000 seat-reservations were cancelled for flights between Japan and China from September to November.

(Additional reporting by Norihiko Shirouzu in BEIJING and Kentaro Sugiyama in TOKYO; Editing by Edwina Gibbs)

((yan.fang@thomsonreuters.com)(86 10 6627 1233)(Reuters Messaging: yan.fang.reuters.com@reuters.net))

Keywords: CHINA CARS/