The Economist Intelligence Unit's latest report, "The new car market in Europe", said demand had peaked and forecast a 10-per cent fall in new car sales volumes by the year 2001.

That would result in 1.5 million units being wiped off the European car market from this year's expected sales level of 14.2 million units.

The report said consumer confidence was being eroded as tougher economic conditions bite. A bleaker outlook has also led corporate customers to replace fleet cars every four years, instead of every three.

The Economist also predicted more discriminatory taxation on vehicle usage as environmental concerns grow.

The one bright spot for the industry's immediate outlook was the convergence of interest rates in those European countries preparing to introduce the euro in January 1999.

The euroshould cut the transaction costs of doing business in the European bloc, said the report. The euro factor together with new models should help sustain some level of demand, it added.

In a divisional breakdown, the Economist report said the small "B" car segment had increased sales by seven per cent in Europe, overtaking the medium-sized "C" segment in 1997. The `B' segment is seen growing by eight per cent in 1998 and set to remain the biggest selling category in the years to 2001.

The `B' segment leader over the last three years has been the Fiat Punto.

The full-sized multi purpose vehicle sector, which comprises 7-9 seater vehicles like the "people carrier", is seen slowing as the sector becomes overcrowded. Development will focus on smaller versions, led by the Renault Megane Scenic and General Motor's Zafira.