Mass-market carmakers Volkswagen (>> Volkswagen AG), Ford (>> Ford Motor Company) and Opel (>> General Motors Company) all made gains, while premium makers BMW (>> Bayerische Motoren Werke AG), Mercedes-Benz (>> Daimler AG) and Audi lost ground.

Europe's car industry has showed signs of emerging from a six-year slump, with registrations bottoming out last year. But sales are increasingly reliant on discounting.

New passenger car registrations in the European Union and the countries of the European Free Trade Area (EFTA) rose 1.8 percent to 701,118 vehicles in August, compared with the same month last year, data from the Association of European Carmakers (ACEA) showed on Wednesday.

The increase was driven by a 26 percent jump in car sales in Portugal and a 13.7 percent jump in Spain, where sales are supported by a government subsidy scheme which gives buyers of new vehicles a rebate for turning in old cars.

Mass-market brands were the big beneficiaries of a pick-up in demand in these countries, which have been struggling under austerity measures. European sales of VW branded cars were up 14 percent, Ford registrations rose 15.2 percent and Opel gained 7.5 percent.

But large European markets were sputtering.

Sales in Germany - Europe's largest car market - fell 0.4 percent. This was a particular blow for the premium car makers as the country is the wealthiest large economy in Europe and their biggest European driver of sales.

It is also the home market for BMW, Audi and Mercedes which means they have well-established dealership networks.

BMW's European sales fell 2.0 percent, Mercedes-Benz registrations dropped 3.9 percent and Audi declined 7.6 percent.

TACTICS

Peter Fuss, automotive expert at Ernst & Young, said it had been the second worst August in the past 12 years for car sales in the EU. "The tentative recovery in the European auto market seems to be running out of breath," he said.

In France registrations dropped by 2.6 percent, and in Italy registrations fell 0.2 percent, ACEA figures show.

"The trend in the European market ... shows that the recovery has yet to stabilise, especially in Italy where demand from families continues to be stagnant," said Romano Valente, head of Italy's foreign carmakers' association UNRAE.

Aside from the slump in sales in Germany, the slip in registrations among premium auto makers may also be down to a shift in sales tactics.

"We have to find the right balance between volume and pricing," BMW Chief Executive Norbert Reithofer told analysts in August. "If you reduce your volume, you can even have a better profit."

Allan Rushforth, Senior Vice President of Hyundai Motor Europe said: "Where there is still growth for the industry, it is driven by heavy incentive spending."

Hyundai sales rose 1.2 percent in August. Rushforth said, however, this was driven by demand rather than incentives.

ACEA also released sales figures for July. Passenger car registrations in the EU and EFTA countries - Iceland, Liechtenstein, Norway, Switzerland - rose 5.6 percent on the year, to 1,081,686 vehicles.

(Additional reporting by Jan Schwartz; Editing by Kirsti Knolle and Pravin Char)

By Edward Taylor and Agnieszka Flak