In a move to bolster the beleaguered auto industry, the U.K. government Wednesday announced plans to introduce scrapping incentives to spur demand for new cars.

The action was welcomed by the Society of Motor Manufacturers and Traders, which for months has lobbied on behalf of the industry for a scrapping initiative to support the automotive sector in the U.K.

Retail Motor Industry Federation Chairman Paul Williams said the plan would "boost the new car market, encourage consumers to get back into car showrooms, and reduce the likelihood of employee downsizing."

Scrapping incentives have been effective in cushioning the drop in car sales in Europe in recent months. New-car registrations, a measure of sales, in March fell 9% from the same month a year ago as countries, including Germany, France and Italy, have put in place plans that offer payments for car owners who scrap older vehicles and buy new, fuel-efficient models.

Analysts harbor doubts about the long-term effectiveness of such initiatives: Some argue that as funding for the measures expires, sales will fall sharply unless economies pick up.

That hasn't stopped other countries from considering their own scrapping incentives. The U.S. and Japan are among those weighing up plans.

Chancellor of the Exchequer Alistair Darling on Wednesday said U.K. motorists would be offered GBP2,000 in discount on new vehicles when they trade in cars that were more than 10 years old. The plan would be implemented next month and would run until March, 2010, Darling said.

The government will set aside GBP300 million to pay for the plan with funding matched by participating manufacturers. That suggests the cost of the discount will be split evenly between the government and car makers.

U.K. new-car registrations in March fell 31% year-on-year as the recession continued to deter consumers from spending on big-ticket items.

March's figures are a particularly heavy blow to the U.K. auto industry and highlight the severity of the problem: March has been the largest volume month in six of the 10 years since the switch to the twice-yearly registration-plate change in the U.K. The month typically accounts for 18% of the annual market and last year took a 21% share.

The U.K. new-car market in 2009 is expected to fall to 1.72 million vehicles from 2.13 million in 2008 and 2.4 million in 2007.

Production in February fell 61% from the same month a year ago. As output has tumbled in line with the fall in demand, automakers have taken action to cut costs, including shorter working weeks and thousands of job losses.

Automakers had hoped for a bailout from the European Union similar to that provided by the U.S. to General Motors Corp. (GM) and Chrysler LLC, but those expectations have dimmed as the recession has deepened.

Still, the European Investment Bank, the E.U.'s lending arm, has doled out hundreds of millions of euros in loans to support automakers with operations in the U.K.

Nissan Motor Co. (7201.TO) earlier this month won approval for a EUR400 million loan to build more fuel-efficient vehicles in the U.K. and Spain, while Tata Motors Ltd. (TTM) was granted EUR366 million to fund an emissions-reduction program. Tata Motors owns U.K. manufacturer Jaguar Land Rover.

According to the SMMT, the U.K. car industry accounts for 10% of the country's total exports. The sector generates annual revenue in the region of GBP51 billion and supports 850,000 jobs.

 
   -By Jonathan Buck, Dow Jones Newswires; +44 207 842 9237; jonathan.buck@dowjones.com