Top U.S. auto dealership group AutoNation Inc posted a 29-percent drop in quarterly earnings but forecast an improving U.S. vehicle market after slashing inventory costs and seeing a sharp gain in July sales.

The downward spiral has been broken, AutoNation Chief Executive Mike Jackson said.

AutoNation's showroom traffic jumped by 36 percent over the past week since the introduction of the U.S. government's cash for clunkers sales incentive, Jackson told Reuters.

In addition, the auto dealership chain increased new vehicle orders by 45 percent in the past quarter to prepare for a recovery in industry-wide auto sales, Jackson said.

Second-quarter net earnings fell 29 percent to $36.7. million, or 21 cents per share, from $51.8 million, or 29 cents per share a year earlier. Revenue dropped 29 percent to $2.6 billion.

Excluding one-time items, earnings from continuing operations were 29 cents per share. That was above the 25 cents per share analysts on average had forecast on that basis, according to Reuters Estimates.

Its shares were down 65 cents to $19.98 in premarket trading.

(Reporting by Kevin Krolicki; Editing by Derek Caney)