Germany's new car market shrank for a fourth consecutive month, posting a 26.5 percent year-on-year decline in March, still feeling the affects of the end last year to government incentives for new car buyers.

The March result brought the decline in the first quarter to 23 percent but it is only down only about 9 percent when compared to 2008, before the scrappage scheme, official data showed on Tuesday.

The share of new cars with diesel engines showed the expected recovery in March, Volker Lange, head of the VDIK association of foreign carmakers, said in a statement.

Mini and compact cars, which gained disproportionally in 2009, declined in March, he said, adding that they had double-digit growth when compared to March 2008.

Demand in Germany has slumped sharply since the 5 billion euro ($6.7 billion) federal vehicle scrapping scheme ran out of funds at the start of September and the declining orders have slowly fed through to new car registration statistics.

A long and harsh winter also caused potential car buyers to put off a trip to the auto dealership.

Germany, which is Europe's biggest car market, is bucking the trend in other major European markets that are growing thanks to government incentives.

Germany is benefiting from the trend through its exports, which rose 51 percent in March, the German automaker association VDA said.

The sentiment in the automotive industry is brightening up, VDA President Matthias Wissmann said.

We will not reach last year's level in 2010, but we see a good year for exports. The German automotive industry will benefit strongly from the dynamic development in growth markets, he said.

($1=.7457 Euro)

(Reporting by Eva Kuehnen and Michael Shields; editing by Karen Foster)