Rua Consolacao in downtown Sao Paulo has its share of new car lots, but the one with the big VW hanging over the door is seeing the most action.

"They are coming in for the Novo Gol and the Fox, and we want them to keep coming in," said Oscar Ferreira, sales manager of a Volkswagen dealership on Rua Consolacao.

The subsidiary of German auto maker Volkswagen AG (VOW.XE) couldn't be happier with sales in Brazil. While car lots sit packed with unsold vehicles in Europe and the U.S. owing to ailing economies, Volkswagen in Brazil sold 38.6% more cars in March than it did in February.

Last month, it sold 12% more than its rivals, while the general market sold just 1% more and major auto makers like Ford (F) and General Motors (GM) saw sales decline.

Volkswagen owes its success to the successful June 2008 launch of its four-door hatchback, the Novo Gol and its upgraded Gol, a two- or four-door hatchback. Both vehicles have sent Volkswagen ahead of 2007 and 2008 market leader, Fiat when it comes to car sales.

"We'll admit it, these Gol sales are surprising even our best projections," said Gustavo Luis Schmidt, sales director of Volkswagen in Sao Paulo. Novo Gol car sales are 20% to 25% above expectations, according to Schmidt.

In a recent poll by Brazilian auto magazine Quatro Rodas, three of the top 10 cars readers were inquiring about most were Volkswagens. There wasn't a single Fiat on the list. Toyota Corolla was No. 1, but is an expensive import by comparison to the roughly 27,500 Brazilian reals ($12,387) Gol models.

Brazilian car sales have been breaking records over the last several years. Brazil has become a growth story for international auto makers. But when the financial crisis hit Brazil in October, the story changed and car sales plummeted. Risk-averse banks raised rates and shortened payment terms. Mostly all of them increased down payment requirements. Sales dropped immediately, until the government gave auto makers a temporary tax break on a federal industrial production tax. Lighter weight cars like the Gol saw sticker price reductions of 7.7%.

Nationally, car sales have been picking up since December and rose on the month by 36.2% in March to 271,442 units, according to the National Motor Vehicle Manufacturers Association, or Anfavea. Volkswagen sold 58,929 cars to Fiat's 54,109 units. Fiat figures are higher when pickups and sport utility vehicles are thrown in. Fiat sold 64,469 cars and trucks to Volkswagen's 64,298. Since January, Volkswagen has sold 152,172 cars and trucks while Fiat has sold 152,761 units.

"Fiat is certainly not out of the running," said Andre Beer, a former executive at General Motors now running an automotive industry consultancy in Rio de Janeiro.

"Car sales are rising so much in Brazil not only because of the tax break, but because there is a stupendous amount of demand here," Beer said.

In Brazil, there are 7.2 habitants per vehicle compared with around 1.5 habitants per vehicle in mature car markets like the U.S, he said.

Meanwhile, back in the Volkswagen-Fiat auto race, Volkswagen sold around 28,000 Gols in March. The Voyage, a Gol inspired sedan and the company's latest addition, sold 7,402. Fiat's brand new Linea sedan, on the other hand, sold under a thousand units, according to the National Automotive Dealership Association, or Fenabrave.

"Volkswagen has the only new low-cost product on the market right now," Beer said, adding that credit is loosening up and that has provided an extra relief.

-By Kenneth Rapoza, Dow Jones Newswires; 5511-2847-4541; kenneth.rapoza@dowjones.com