Oct. 21 (Bloomberg) -- PSA Peugeot Citroen, Europe’s second-biggest carmaker, said revenue fell 7.7 percent in the third quarter on lower prices and a slump in overseas sales. The shares dropped the most in more than two months.

Revenue declined to 11.8 billion euros ($17.7 billion) from 12.8 billion euros a year earlier, the Paris-based company said today in a statement. While global volume sales rose 10 percent to 788,000 vehicles, led by Europe and China, sales fell 13 percent in Latin America and dropped by half in Russia.

The “disappointing third-quarter numbers may undermine confidence in mass-carmaker cash flows in the second half and 2010,” Stuart Pearson, a London-based analyst at Credit Suisse, said in an e-mailed message, reiterating the bank’s “underperform” rating on Peugeot shares.

Chief Executive Officer Philippe Varin has pledged to reduce Peugeot’s dependence on saturated European markets by expanding abroad. Excluding China and sales of unassembled vehicles, global sales were unchanged as a western European boost from government-backed incentives was overwhelmed by declines in the rest of the world and a loss of market share in Latin America.

Peugeot fell as much as 1.77 euros, or 7.3 percent, to 22.40 euros, the steepest intraday decline since August 7. The stock traded at 22.70 euros as of 10:52 a.m., valuing the carmaker at 5.3 billion euros.

Revenue Disappointment

“What we have today is a revenue disappointment and no obvious sign of the large production re-ramp that many have anticipated,” Adam Jonas, a London-based Morgan Stanley analyst with an “overweight” rating on Peugeot, said in a note.

The carmaker’s revenue decline slowed from a 19 percent fall in the second quarter and a 25 percent drop in the first. Peugeot said revenue dropped 4.1 percent at the auto division, 21 percent at parts unit Faurecia, 20 percent at trucking division Gefco and 14 percent at sales-financing unit Banque PSA Finance.

In a presentation posted on its Web site today, Peugeot said a shift in demand toward smaller, cheaper models wiped 2.8 percent from auto-division revenue in the quarter, more than offsetting a 1.9 percent increase in prices. The company also trimmed stocks of unsold vehicles by 31,000 units to 400,000 over the three months.

Peugeot and Citroen’s combined European market share rose to 13.4 percent from 12.9 percent as its smaller cars benefited from government-backed sales subsidies.

German Incentives

“The most favorable impact was in Germany,” where the incentive measures led to a 23 percent increase in demand, Peugeot said.

Peugeot is planning a push in Germany, Europe’s biggest car market, with new models including the 5008 minivan designed to challenge incumbents such as the Zafira from Opel, General Motors Co.’s European division being sold to Magna International Inc.

Vehicle sales rose 6.6 percent in the quarter to 508,000 units in Europe excluding Russia, where deliveries dropped by 50 percent to 9,000 units. Deliveries fell 13 percent to 62,000 vehicles in Latin America, outpacing the market’s 7.6 percent decline, and dropped 22 percent to 45,000 units in the rest of the world.

To contact the reporter on this story: Laurence Frost in Paris at lfrost4@bloomberg.net

Last Updated: October 21, 2009 04:55 EDT