Toyota Motor Corp's Prius hybrid was Japan's best-selling car in May, a dealers' group said on Thursday, attesting to robust demand for low-emission cars helped by government incentives amid flagging auto sales.

Competition is also heating up between automakers as the Prius, of which a new model hit the market last month, grabbed the top slot for the first time after Honda Motor Co's new Insight became the first hybrid to head the best-seller list in Japan in April.

I think a green car tax break and other incentives helped the sales performance (of the Prius) quite a bit, Akihiko Otsuka, chief engineer for the new Prius, told reporters in Toyota City, home to the automaker.

The third-generation model Prius, which went on sale on May 18, was priced about $3,000 less than the previous version and there were more than 80,000 advance orders for it.

Toyota said on its web site that factory shipment would be mid-November or later for orders made after May 31.

The Popularity of hybrid cars will undoubtedly continue as their prices have come down to affordable levels and will be more so in coming models, said Kazutaka Oshima, CEO of Rakuten Investment Management. In addition, oil prices have been rising again lately, he said.

A ranking of Japan's top 30 excluding 660cc minivehicles by the Japan Automobile Dealers Association showed the Prius selling 10,915 cars in May, followed by Honda's Fit compact with sales of 8,859 cars. The Insight was in third place with 8,183 cars.

Gas-sipping hybrid cars have become a rare bright spot in an industry hit hard by recession, and Toyota and Honda are locked in a fierce battle in the category.

But some analysts have pointed to a growing challenge for Toyota to strike a balance with sales of gasoline cars, which have higher profit margins.

(Additional reporting by Chang-Ran Kim in Toyota City; Editing by Michael Watson)