French car maker PSA Peugeot Citroen
posted a 1.5 percent drop in car sales in 2011 as expansion in emerging markets failed to offset a decline in its market share in crisis-hit Europe.

Europe's second-biggest car maker after Germany's Volkswagen said it sold 3.5 million cars last year, noting that prices had come under severe pressure in Europe by September and that performance across the region varied widely.

Reacting to speculation of a possible tie-up with Italian car maker Fiat , PSA's recently appointed head of brands, Frederic Saint-Geours, said conditions for a possible accord with another car maker were not right at the moment.

Our main shareholders have said: if it's necessary to develop the group ... to look at its strategic options, we are ready to do that, he told France's BFM radio. It's just that this type of an alliance needs to meet certain conditions.

Fiat CEO Sergio Marchionne said earlier this week that Europe's auto industry needed consolidation to reverse poor operating conditions and uncertainty in a market burdened by overcapacity and little or no sales growth potential this year.

PSA's Saint-Geours said the European car market would fall 3 percent this year, dropping more in the first half, though 5-10 percent growth in emerging markets such as China, Latin America and Russia would help the global auto market grow 3-5 percent.

PSA has been trying to beef up its flagging performance by expanding in fast-growing emerging markets by launching several new car models. It is replacing ageing models in the key subcompact B category, like the Peugeot 207, and has shifted its focus to up-market models such as the C4 Aircross.

Still, the group warned in October that its core automotive division would likely post a loss in 2011 and, in a move to focus on its rebranding, appointed former finance director Saint-Geours as head of brands.

In 2011, the situation in the European automotive market ... confirmed that our strategy of becoming more global and moving the Peugeot and Citroen brands further upmarket is the right one, Saint-Geours said in a statement.

He expected to speed up implementation of the new strategy.

OUTSIDE EUROPE

Group unit sales fell 6.1 percent in Europe, shaving off 0.9 points of market share, but grew 10.6 percent in Latin America, 7.6 percent in China and 34.8 percent in Russia.

The group, like Renault , has clearly underperformed in its main market, CM-CIC Securities analyst Florent Couvreur wrote in a research note, calling Europe a burden for the group.

The outlook for 2012, particularly in Europe, does not seem to be inviting, he wrote. He forecast an 8 percent drop in the French car market, which represents 27 percent of group sales, in line with PSA's own outlook for the year.

The proportion of PSA's car sales outside Europe expanded to 42 percent from 39 percent in 2010 as it goes for growth in emerging markets and aims to make its brands more global.

PSA kept its target of achieving 50 percent of sales outside Europe in 2015 and two-thirds in 2020.

PSA pointed out that growth of car sales in China, the world's top market, had slowed to cruising speed from fast growth in previous years.

The China Association of Automobile Manufacturers (CAAM) showed that car sales in the country climbed 5.2 percent in 2011, the slowest pace since the nation's car culture took off about 10 years ago, as consumers shunned local brands after Beijing scrapped tax incentives for small cars.

But solid demand for foreign brands led to total car sales of 14.5 million, about 2 million more than in the United States last year.

PSA shares were up 1 percent at 13.08 euros by 0917 GMT.

(Editing by Dominique Vidalon and Jane Merriman)