BERLIN (Reuters) - Volkswagen (>> Volkswagen AG) lowered its global sales forecast on Wednesday and said it was braced for stagnant volumes in China, after years of double-digit growth in its biggest market.

The German carmaker, which overtook Toyota (>> Toyota Motor Corp) as the world's largest carmaker by sales in the first half of this year, has long seen China as a stable source of revenue to fund global expansion.

But finance chief Hans Dieter Poetsch said profits from VW's two Chinese joint ventures could even drop this year below 2014 levels amid a shift to lower-priced cars, as demand in is increasingly driven by rural, less wealthy Chinese regions.

Last year VW sold over a third of its record 10.1 million vehicles in China.

"China is going to be a massive problem" for VW, said Bernstein analyst Max Warburton who rates the stock "outperform." "Present trends are worrying, with a substantial fall in profit per unit in China."

The German group scaled back its expectations, predicting full-year sales to be flat on year-ago levels, having previously forecast a "moderate" increase.

While VW has just achieved its long-held ambition of becoming the world's largest carmaker three years ahead of target, it also endured a leadership crisis this year. It is now looking for a new chairman and has shelved decisions on a new company structure until September.

"Dependence on China reinforces the need to tackle underperformance in other markets," said Stefan Bratzel, head of the Center of Automotive Management think-tank near Cologne. "VW cannot afford to delay work on structural problems."

Shares in Wolfsburg-based VW closed down 2.3 percent on Wednesday, whereas Germany's DAX index <.GDAXI> gained 0.3 percent. The STOXX Europe 600 automotive index <.SXAP> fell 0.3 percent.

While investors were unnerved by the cut in the sales forecast, VW's results for the second quarter were upbeat, mirroring rival carmakers.

Improving demand in the higher-margin western European market and cost cuts helped VW raise group operating profit to 3.49 billion euros ($3.85 billion) for the quarter, which does not include earnings from Chinese joint ventures, matching average estimates in a Reuters poll.

French peer PSA Peugeot Citroen (>> PEUGEOT) on Wednesday swung back into profit for the first half on cost cuts after three years of losses, and Germany's Daimler (>> Daimler AG) posted record quarterly earnings last week.

VW's steps to increase cost savings at the VW brand to 5 billion euros a year by 2017 are progressing well, said Poetsch, citing further savings from an accelerating push into modular production.

VW is shifting more production to its new cost-cutting modular platform, which it expects to produce 7 million units by 2018 from about 2 million last year.

Group operating profit is set to rise by 13 percent next year to 15.4 billion euros from an estimated 13.6 billion in 2015, the Reuters poll forecast.

Separately, VW stuck to its guidance for an operating margin range of 5.5 to 6.5 percent this year, after 6.3 percent in 2014, and still expects annual revenue to rise as much as 4 percent from 202.5 billion euros.

(Editing by Louise Heavens and Susan Fenton)

By Andreas Cremer

Stocks treated in this article : PEUGEOT, Daimler AG, Volkswagen AG, Toyota Motor Corp