July 8 (Bloomberg) -- PSA Peugeot Citroen SA, France's biggest carmaker, said west European sales will fall 4 percent this year and Fiat SpA plans to idle Italian plants as record oil prices and accelerating inflation hurt consumer spending.

Peugeot dropped to the lowest since Dec. 3, 1999, in Paris trading and Fiat, Italy's biggest automaker, fell the most in two weeks in Milan. Evidence of the industry's deteriorating outlook dragged down Renault SA and tiremaker Michelin & Cie.

Fiat will shut four factories for three weeks, cutting production of Multipla vans, upscale Alfa Romeo models and the Grande Punto hatchback, which in 2005 helped restore profit after four years of losses. The Turin-based company's Italian sales fell 16.5 percent in June. Peugeot said European demand will suffer ``an even greater slowdown'' in the second half.

``The rest of the year is going to be a disaster for European manufacturers,'' said Stephen Pope, London-based chief global market strategist at Cantor Fitzgerald Europe. ``I can't see anyone making money. What we are seeing is mass-market producers finally realizing their pool of demand is very small.''

Fiat fell 46.4 cents, or 4.5 percent, to 9.86 euros and was at 9.84 euros. The stock has slumped 44 percent this year, cutting the company's market value to 12 billion euros ($18.8 billion).

Peugeot, Europe's No. 2 carmaker after Volkswagen AG, dropped 45 cents, or 1.4 percent, to 31.50 euros, taking its slump this year to 39 percent and giving a value of 7.38 billion euros. The nine-member Bloomberg Europe Auto Manufacturers Index was down as much as 3.8 percent, the most since Feb. 7.

22,000 Workers

Fiat's layoffs will affect four of its six Italian car plants between September and November, a company official said today. The sites at Mirafiori, Termini Imerese, Pomigliano and Melfi employ 22,000 people, or about three-quarters of Fiat Auto's Italian workforce.

Sales in Italy, Europe's second-biggest car market, fell 19.5 percent in June, a sixth straight monthly decline, as record oil prices and a slowing economy put off consumers.

U.S. automakers have already curbed production as demand wanes. A Ford Motor Co. truck plant in Wayne, Michigan, has shut down for nine weeks and the company is offering buyouts to workers at four U.S. factories. First-half sales of cars and light trucks slid 14 percent at Ford, 16 percent at General Motors Corp. and 22 percent at Chrysler LLC.

Toyota Motor Corp., the world's second-largest carmaker after GM, said June 24 it may cut its 2008 U.S. sales target.

U.K. Decline

Like Toyota, Peugeot is counting on growth in emerging markets such as Russia to spur volumes. The French company's U.K. sales dropped 7.9 percent in the first half as it sought to reduce reliance on less profitable smaller models and low- margin deals with fleet customers and rental firms.

Gilles Michel, Citroen chief executive officer, said the brand will be ``more selective'' after British registrations plunged 9.1 percent, outpacing the market's 1.2 percent decline.

Fiat said July 3 it would reduce production of its best- selling Daily truck, made by the Iveco SpA unit, by about 10 percent to 325 vehicles a day. The company said then it would also lay off about 6,000 workers for four days this month at the Melfi plant in southern Italy, which makes the Grande Punto.

Of the other factories affected, the flagship Mirafiori site produces Multipla and Idea minivans, as well as Grande Puntos and the Lancia-branded Musa van. Termini Imerese makes Lancia small cars and the Pomigliano plant makes Alfa Romeos.

Slowdown `Harsher'

``The production cutbacks show the slowdown is going to have a strong impact on earnings,'' said Karim Bertoni at Banque Syz & Co. in Geneva, which manages $24.8 billion. ``The slowdown will be harsher and car sales even more disappointing.''

The decline in Italian auto sales is outstripping the rest of Europe as the government reduces cash incentives to replace older models just as the economy slows and crude oil trades above $140 a barrel, depressing sales.

Incentives last year helped boost registrations to a record 2.5 million, making the country Europe's No. 2 auto market after Germany. Growth in the continent's fourth-largest economy will stall this year, the government forecast July 2. The European Commission said on April 28 that Italy's economy will expand 0.5 percent this year, the slowest pace of 15 nations sharing the euro.

Cutbacks `Inevitable'

``The cutbacks which will involve some thousands of Fiat workers were inevitable in the light of the Italian market slump,'' Enzo Masini, head of automotive affairs at the Fiom- Cgil trade union, said today in an e-mailed statement.

Fiat said that during the layoffs it will apply to have its workers paid by Cassa Integrazione Guadagni, a public fund financed by companies and the state.

Peugeot's first-half sales rose 4.6 percent overall to 1.85 million vehicles, helped by the 308 compact and growth in Latin America and Russia. The French market fared better than Italy, with registrations advancing 2.1 percent in June, helped by government payments to encourage purchase of smaller cars emitting less carbon dioxide.

Citroen said it will make a new compact minivan, the C3 Picasso, at a lower-cost plant in Trnava, Slovakia. The model will go on sale in the first quarter of 2009, with 110,000 deliveries targeted for the first full year, Michel said. Investment will total about 100 million euros.

Longer Wait

``We'll see further margin compression and that will put manufacturers in a very difficult position,'' said Cantor's Pope. ``Plant shutdowns are typical of what manufacturers are going through. They will realize they will need to start making cars by order to avoid having unsold inventories and customers will need to get accustomed to waiting for their new cars.''

Among other European auto stocks, Renault SA, France's second-biggest carmaker, dropped 2 percent to 49.82 euros.

Parts companies were also lower as stocks were downgraded. Michelin & Cie., the world's second-largest tiremaker, fell 3.2 percent to 46.24 euros as Societe Generale SA forecast a slide in demand from the truck market and switched to a ``sell'' recommendation.

Leoni AG, Germany's biggest manufacturer of auto cables, dropped 6.4 percent to 25.17 euros and Rheinmetall AG, a maker of pistons and engine blocks, closed down 5.7 percent at 41.75 euros, the biggest tumble since Feb. 5 for both stocks, after Cazenove cut the pair to ``in line'' from ``outperform.''

Fiat said separately that it plans to join forces with luxury carmaker Bayerische Motoren Werke AG to build cars on a common chassis in an effort to reduce development costs and help reintroduce Alfa Romeo in the U.S. The pair signed an accord to explore joint platforms for Alfa and Munich-based BMW's Mini division, they said today.

To contact the reporters on this story: Marco Bertacche in Milan at mbertacche@bloomberg.net; Laurence Frost in Paris at lfrost4@bloomberg.net.

Last Updated: July 8, 2008 13:05 EDT