Japanese car manufacturers unexpectedly posted profits on Wednesday and Mercedes-maker Daimler forecast improving performance this year but clear sings of sustained recovery for the world's battered auto sector remained elusive.

Global automakers have seen sales crumble in the past 12 months due to economic downturn and tight credit markets that have already driven U.S. rivals General Motors and Chrysler to bankruptcy and restructuring.

Governments around the world have introduced stimulus measures to revive the sector which is also racing to reposition itself for more ecologically-minded buyers with hybrid cars and electric vehicles.

Germany's Daimler AG posted a 1 billion euro second quarter loss that beat expectations and said it expects a gradual improvement in group operating profitability in the course of the year.

Honda and Nissan, Japan's number two and three manufacturers, posted big profit falls from a year earlier but both managed to stay in the black, surprising analysts who expected operating losses in the April-June quarter.

Conditions remain extremely severe in the auto market, Honda Executive Vice President Koichi Kondo told a news conference.

France's PSA Peugeot Citroen generated positive free cash flow of 467 million euros in the first half, thanks to sharp cuts in vehicle stocks. But free cash flow would be negative in the second half, as no more stock cuts could be made, finance chief Frederic Saint-Geours told a news conference.

Its shares surged nearly 10 percent.

Elsewhere, the head of Volkswagen's commercial vehicle division said he expects demand to improve gradually from the second half of this year until the end of 2010.

And UK-based car dealer Inchcape beat analysts' forecasts with a H1 underlying profit of 65.4 million pounds, 58 percent lower year-on-year.

IN THE BLACK

Honda turned a profit of 25.2 billion yen, down 88 percent, as car sales tumbled and raised its full-year forecast as it said it expected sales to improve.

Nissan, held 44 percent by France's Renault, posted a similar fall of 86 percent to a profit of 11.6 billion yen, as cost cuts mitigated the effects of falling sales and a stronger yen.

It highlighted some bright signs on the sales front -- particularly strong growth in China -- but said it did not see a convincing recovery in global car demand, and repeated its full-year forecast of an operating loss of 100 billion yen.

Honda's shares closed up 1.1 percent. Nissan shares had closed up 0.8 percent before its results were released.

CASH FLOW

At Daimler, Chrysler-related expenses of 387 million euros along with 217 million in restructuring charges at its trucks division weighed on results but the group managed to increase its cash cushion.

The figures were better than the consensus. Particularly the free cash flow is better than expected. That's the key point, said UniCredit analyst Georg Stuerzer. Daimler shares were up 5.18 percent at 1201 GMT (8:01 a.m. EST).

The German group generated positive free cash flow in its industrial business of 1.4 billion euro amid a sharp 34 percent cut in Mercedes production.

Peugeot swung to a recurring operating loss of 826 million euros from a profit of 1.115 billion last year, with both sales and profit falling short of analysts' expectations.

Peugeot said Europe's car market would not start recovering until late 2010 but its shares surged as analysts welcomed an improved cash position. The group saw good potential from the Chinese and Brazilian markets.

PSA said it expected to increase its market share above 14 percent in Europe in the second half, and Morgan Stanley analysts said the group's net financial position was significantly better than expected. The group has no major debt to pay back in 2009 or 2010, it said.

CEO Philippe Varin said the group would be open to looking at partnership opportunities as long as they would create value and allow the group to maintain its independence.

Analysts had been eagerly awaiting more clues on group strategy. In June, shortly after he took control at the group, Varin told shareholders the group would be open to acquisitions or partnerships to boost its presence in markets it hopes will hold up in the face of the widespread sales slump.

For a FACTBOX on the market shares of carmakers reporting results on Wednesday click on

(Additional reporting by Gilles Guillaume and Maria Sheahan; Writing by Helen Massy-Beresford, Editing by Will Waterman and Marcel Michelson)

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