Ford Motor Co said on Thursday it is increasing production over the rest of the year to meet increased demand spurred by the U.S. government's Cash for Clunkers sales incentive program.

Ford said it now plans to build 495,000 vehicles in the third quarter, up 10,000 from its previous forecast. That would mark an increase over year-earlier levels of 18 percent.

The No. 2 U.S. automaker also set a fourth-quarter production target of 570,000 vehicles, up 33 percent from year-earlier levels.

The output gains will translate into immediately higher revenues for Ford, the only U.S. automaker to have avoided a federally sponsored bankruptcy. Major automakers book revenue when vehicles are manufactured and shipped to dealers.

Shares of Ford rose 2.0 percent to $7.85.

Ford had previously planned to detail its production plans in early September but said it had been forced to act earlier because sales at showrooms had remained strong through the first weeks of August.

Other major automakers have also raised production. General Motors Co said it will detail stepped-up production plans for the rest of 2009 by the end of August.

Ford executives said the additional $2 billion approved for the U.S. government's incentive program could be exhausted by late August or early September.

The program has provided a sharp boost to sales of Ford's smaller and more fuel-efficient vehicles, including the Ford Focus sedan and the Escape small utility vehicle.

Inventories of the Escape dropped to 21 days of supply at the end of July and to 25 days for the Focus, Ford said. That compares with a more typical target closer to 60 days of sales in the auto industry.

Ford sales analyst George Pipas said the automaker expects U.S. auto sales to slow once funding for the clunkers program is spent and does not expect to end the year with surplus inventory.

We're proceeding very carefully, Pipas said. When we get to the end of the year I believe our inventory levels will still be viewed as lean.

Ford economist Ellen Hughes-Cromwick said the automaker estimates that the U.S. government trade-in incentive could boost 2009 industry-wide sales by up to 750,000 vehicles.

She estimated that up to 40 percent of those sales were incremental, meaning consumers who otherwise would not have been shopping for new cars have become buyers because of the rebate.

The U.S. government incentive program, modeled on programs pioneered by about a dozen European governments, offers consumers taxpayer-funded rebates of up to $4,500 to swap out of older, less fuel-efficient cars.

The popularity of the program exhausted the first $1 billion budgeted for it by late July, prompting Congress to authorize another $2 billion in funding.

Pipas said it is too early to estimate U.S. industrywide sales for August but said early results from dealers show sales trending significantly above the 13.6 million vehicle annualized rate of a year earlier.

The stronger sales will also likely push 2009 industry-wide sales to the top end of Ford's existing full-year forecast of between 10.3 million and 10.8 million vehicles.

It probably pushes it to the high side, he said.

(Reporting by Kevin Krolicki, editing by Gerald E. McCormick)