Toyota Motor Corp <7203.T> said on Thursday its group-wide sales fell 27 percent to 1.767 million vehicles in the first quarter of 2009, keeping it ahead of Volkswagen AG as the world's top-selling carmaker.

Toyota was expected to be in a tight race with the German automaker in the January-March quarter, when the Japanese giant suffered double-digit percentage drops in its three biggest markets of the United States, Japan and China.

For the parent company only, which excludes trucks and cars sold by subsidiaries Hino Motors Ltd <7205.T> and Daihatsu Motor Co <7262.T>, Toyota sales fell 28 percent to 1.53 million vehicles.

Volkswagen delivered 1.4 million vehicles during the quarter, down 11 percent, which increased its share of the global passenger car market by 130 basis points to 11.0 percent, the automaker said. The tally does not include sales at Porsche

, which owns 51 percent of Volkswagen.

The gap in group-wide sales between Toyota and Volkswagen shrank to 363,000 vehicles in the January-March quarter from 840,000 a year earlier.

The German automaker, with nine brands including Audi , Skoda and Seat, is aiming to surpass Toyota and General Motors Corp as the world's No.1 seller by 2018.

Toyota is suffering from collapsing demand in its two biggest markets -- the United States and Japan -- while Volkswagen enjoys growth in its main markets of China, Germany and Brazil, where state-backed incentives are driving sales.

Toyota's sales may be boosted, however, by an incentive Japan is expected to launch this month for older cars to be scrapped and replaced with new ones in a program styled after Germany's stimulus.

The United States is mulling a similar scheme.

(Reporting by Chang-Ran Kim; Editing by Michael Watson)