* Weak economy, high oil prices make consumers cautious
* Annualized sales rate of 11.8 mln lowest in eight months
* GM and Ford sales decline, fall short of estimates
* GM, Ford shares both close down about 5 pct (Recasts first sentence, adds final industry sales numbers, Toyota details, updates share prices)
By Ben Klayman and Deepa Seetharaman
DETROIT, June 1 (Reuters) - U.S. car sales sputtered in May, slumping to levels that were much lower than expected as higher vehicle prices led consumers to put off purchases in the face of a weakening economy.
Tightening supplies of vehicles after the Japan earthquake emboldened many companies, including Toyota Motor Corp (7203.T) and Honda Motor Co Ltd (7267.T), to raise car and truck prices, a strategy that analysts and investors said had backfired.
"They may have jumped on the price increases a little early when the consumer is not quite ready," said Gary Bradshaw, a portfolio manager with Hodges Capital Management, which owns Ford shares.
"I think it kind of nipped them in the rear a little bit," he said.
Take a Look [ID:nCARS1]
Table of May U.S. auto sales [ID:nN01111580]
Graphic of light vehicle sales r.reuters.com/def89r
Table of top 20 selling vehicles in US [ID:nN01205472] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Monthly car sales figures are among the first snapshots of consumer demand. The May results joined a string of downbeat economic data in recent days, from weak hiring to shrinking consumer confidence, that has raised concerns that the U.S. recovery is running out of steam. [ID:nN01147563]
U.S. auto sales in May fell 3.7 percent from last year to 1.06 million, or an annualized rate of 11.8 million. That falls far short of the 12.6 million expected by a Reuters poll of economists and is the lowest rate since 11.76 million in September 2010.
Until now the light vehicle sales rate has held above 13 million for every month this year except January.
GM U.S. sales chief Don Johnson said the industrywide sales rate would probably be below 13 million for "the next couple of months," but both GM and Ford stood by their 2011 forecasts for sales of between 13 million and 13.5 million cars and trucks.
Several investors said those projections may be too optimistic given high unemployment and a poor housing market.
"People will question, 'Well, are we really on track for that 13 million yearly sales?' and at this rate, we're not," Bradshaw said.
GM and Ford shares closed down about 5 percent and 4.6 percent, respectively, in trading on the New York Stock Exchange. The S&P 500 .SPX fell 2.3 percent.
Data firm TrueCar.com estimated that the average transaction price for light vehicles in the United States was $29,817 in May, the highest ever recorded in data going back to 2002. Honda and Toyota led the way with the biggest increases from April at 2.6 percent and 1.6 percent, respectively.
Incentives, which lower the price of a vehicle, fell sharply in May, led again by Toyota (off 53 percent from April) and Honda (down 43 percent), TrueCar said. GM cut its incentives by almost 12 percent.
"Early in the month, consumers sat on their hands," GM's Johnson said when asked about how higher prices had affected consumer behavior.
The trend toward higher prices in May could quickly reverse in June, however, as Toyota on Wednesday rolled out a series of low financing and lease deals across much of its U.S. model lineup.
Barclays Capital analyst Brian Johnson had estimated Toyota and Honda lost significant market share in May after cutting their incentives drastically to preserve inventories. However, investors and industry officials said that Toyota will not be alone in boosting incentives.
"As inventories normalize in the next few months, we're all going to be forced to do what we do best -- and that's compete," said Al Castignetti, Nissan Motor Co Ltd's (7201.T) North American sales chief. Asked if that meant industry incentives would rise, he replied, "Yes, absolutely."
GM sold 221,192 vehicles in the month, down 0.5 percent from 222,305 in May 2010 excluding four brands the company no longer sells.
Ford sold 192,102 cars and trucks in May, down 0.1 percent from 192,253 a year earlier.
"We're hitting a soft patch in the economy and it will hit a lot of the auto companies," said Mirko Mikelic, portfolio manager at Fifth Third Asset Management.
The auto industry, particularly in Japan, was already facing leaner inventories after the March 11 earthquake, which had led many analysts to lower sales estimates for May. The earthquake damaged assembly plants that resulted in supply disruptions and reduced output.
Chrysler Group LLC FIA.MI said its May U.S. vehicle sales rose 10 percent from a year ago to 115,363, driven by a 55 percent jump in sales of Jeep models.
Another automaker that had a good May at the expense of the struggling Japanese automakers was South Korea's Hyundai Motor Co (005380.KS) as sales jumped almost 21 percent.
Japan's Toyota and Honda were hit hardest by the earthquake and their U.S. sales fell 33 and about 23 percent, respectively. Nissan's fell 9.1 percent.
Earlier on Wednesday, Japanese and European automakers reported drops in vehicle sales, while South Korean carmakers continued to gain traction. [ID:nL3E7GV20E] [ID:nLDE7500DU] (Reporting by Ben Klayman, Deepa Seetharaman and Mike Miller in Detroit, editing by Matthew Lewis)