Toyota Motor Corp <7203.T> reported its third straight quarterly loss, but beat expectations and said its annual loss would be smaller than earlier forecast, as deep cost reductions help make up for some of the slump in global vehicle sales.

Toyota, the world's biggest automaker, has been hammered as its sales sink by double-digits in Japan, Europe and the United States despite help from some governments to encourage consumers to buy cars.

But production is gradually picking up in Japan, most notably to assemble more of the Prius hybrid car, for which customers in Japan are waiting at least eight months for delivery.

Still, demand focused on a single car whose supply is limited risks holding back sales of other more profitable cars, and analysts are watching to see how much a sales improvement translates into earnings.

Toyota significantly lowered the selling price for the third-generation Prius to compete more effectively with Honda Motor Co's <7267.T> rival Insight hybrid.

In the April-June quarter, which saw two U.S. automakers succumb to bankruptcy, Toyota made an operating loss of 194.9 billion yen ($2.04 billion). That compared with a profit of 412.6 billion yen a year earlier and a consensus loss estimate of 326 billion yen in a survey of five analysts polled by Thomson Reuters.

Toyota lost a net 77.8 billion yen, swinging from a profit of 353.7 billion yen in the first quarter a year ago. Revenue declined 38 percent to 3.84 trillion yen.

Toyota raised its forecasts for global vehicle sales by 100,000 vehicles to 6.6 million, solely on the back of expected sales in Japan, where it has benefited from incentives and tax breaks on more environmentally friendly vehicles. It also raised its target for cost savings to 900 billion yen from 800 billion yen, through steps such as accelerating measures to eliminate quality-related costs and cutting labor costs through work-sharing.

For the year to March 31, 2010, the maker of the Prius hybrid forecast an operating loss of 750 billion yen and net loss of 450 billion yen, better than its projections three months ago for a losses of 850 billion yen and 550 billion yen, respectively.

A survey of 22 analysts by Thomson Reuters put the operating loss forecast at a much better 467 billion yen loss.

Last week, domestic rivals Honda and Nissan Motor Co <7201.T> surprised with a first-quarter profit, which they attributed to deeper-than-anticipated cost reductions.

Automakers could get a further demand boost from a possible extension of the U.S. government's successful cash for clunkers incentive that helped limit Toyota's U.S. sales drop to 11 percent last month.

Profitability could also improve in North America, where Toyota is preparing to dissolve a loss-making plant in California that it ran with General Motors before the U.S. automaker left it behind in bankruptcy with Motors Liquidation Co .

A liquidation would likely result in a one-off loss, but it would help Toyota in the long run by raising the rate of capacity utilization at its other North American factories, analysts said.

Shares of Toyota have gained 37 percent in the year to date, against a 17 percent rise in the benchmark Nikkei average <.N225>.

Before the results were announced, Toyota ended down 1.5 percent versus a 1.9 percent fall in the transport equipment index <.ITEQP.T>

(Editing by Lincoln Feast)