DETROIT - The punishing four-year decline in U.S. auto sales may have reached a turning point this week -- just as Michael Papa handed over the keys to his 1996 Ford Explorer for a government-sponsored trade-in.

Papa, a Detroit-area restaurant owner, and thousands of other Americans took advantage over the past week of the U.S. government's Cash for Clunkers incentive of up to $4,500 to trade in older gas-guzzlers for newer, more fuel-efficient cars.

The sudden rush of demand at car dealerships long empty of customers quickly exhausted the $1 billion allocated for the program and drove U.S. auto sales to their highest level of 2009, analysts and industry executives said.

I wasn't really looking for a new car, but that was a big incentive. That was the driving force to finally get rid of (the old car), said Papa.

His Explorer had 150,000 miles on it and averaged 15 miles per gallon. The Ford Escape he got in return posts average fuel economy of 24 miles per gallon.

Without the incentive, we would have waited another year until the car finally died for good, Papa said, while waiting to pick up the Escape at the Dean Sellers Ford dealership in Troy, Michigan.

Analysts see the success of the program turbocharging July auto sales, one of the earliest snapshots of pent-up consumer demand. The House of Representatives approved on Friday a $2 billion extension of the program and the Senate is expected to act on the bill.

July industry sales appear to have received a nice boost over the past few days from the government's scrappage incentive, Barclays Capital analyst Brian Johnson said in a research note on Friday.

A Reuters poll of 12 analysts shows that U.S. July auto sales taken before the launch of the clunkers program showed a median forecast of 10 million vehicles on an annualized basis.

That would be up from 9.7 million in June and the strongest total since December's 10.3 million annualized sales rate.

Barclays' Johnson said that, if the initial $1 billion was exhausted in the past week, July's annualized sales rate could reach the 12 to 13 million vehicle range.

AutoNation Chief Executive Mike Jackson said it was too early to quantify the impact of the government incentive, but said it was certain to drive sales above 10 million and to the highest levels of the year.

This is the kind of buyer that comes to market once in a decade. They buy these things and keep them forever, Jackson told Reuters. It really is incremental business and that's why it's a brilliantly conceived stimulus program.

The July results are expected to support the view the auto industry has bottomed out after a downturn that forced General Motors Co and Chrysler into bankruptcy and saddled other automakers with deep losses.

The return of new car shoppers comes at a time when dealer inventories have been driven to unsustainably low levels, opening the door to further production increases.

U.S. auto sales have dropped to their lowest since the early 1980s with about 4.8 million sales in the first half of 2009. Sales totaled 13.2 million vehicles last year.

Ford Motor Co, the only U.S. automaker operating without emergency U.S. government loans, is seen posting sales declines of 5 percent to 10 percent, according to analysts.

That would be the smallest decline of the top six U.S. automakers and could support the view U.S. consumers are reacting favorably to Ford's decision to avoid a government bailout.

In the last week, once the (Cash-for-Clunkers) program became official, the sales pace was elevated noticeably, Ford sales analyst George Pipas told Reuters.

The average value of the vouchers has been closer to $4,500 than to $3,500, suggesting the total units involved in the program would be less than the 250,000 estimate that has been widely circulated, Pipas said.

Industry tracking firm expects GM to report a 20 percent drop in July sales, with Chrysler Group sales down nearly 40 percent, Toyota Motor Corp down 15 percent and Honda Motor Co Ltd down 14 percent.

GM emerged from bankruptcy on July 10 by selling most of its assets to a new company funded by the U.S. Treasury. Chrysler exited bankruptcy in June by completing a similar sale to a group led by Italy's Fiat SpA.

Chrysler last week started offering sales incentives of up to $4,500 per vehicle, or zero-percent financing for six years, in a bid to increase demand post-bankruptcy.

Value is the primary motivator for most sales today, said Jesse Toprak, an analyst at Glimmers of hope about the economy and the buzz generated by the Cash-for- Clunkers program are also working in the auto industry's favor.

(Reporting by Soyoung Kim, additional reporting by Kevin Krolicki and David Bailey; editing by Gunna Dickson and Andre Grenon)