PSA Peugeot Citroen has lowered its 2005 profit estimate blaming production cuts to the end of the year to reduce dealer inventories and a €49.5m (£33.7m) fine by the European Union.

Previously, the group had announced a 2005 operating margin target of between 4% and 4.5% of sales and revenue. However, it now expects consolidated operating margin to end the year at around 4% of sales and revenue, compared with 4.1% in the first half.

Peugeot is suffering from declining sales in Europe, its biggest market, as customers shun aging models including the 206. Stagnating industry demand is fostering ‘an aggressive competitive environment’ that prompted the company to reduce output to avoid cutting its margins on the cars it sell.

Peugeot's third-quarter revenue rose 0.8 per cent to €12.8 billion (£8.7bn), a smaller gain than the 1.3 per cent increase to €41.8 billion (£28.5bn) for the first nine months.

Vehicle sales in western Europe fell 1.7 per cent to 1.76m units in the first nine months of the year. Globally, unit sales rose 1.1 per cent to 2.5m over that period.

Sales of the 206 fell 14 per cent in the third quarter to 148,000 units.

In the third quarter, registrations of Peugeot vehicles in western Europe declined one per cent to 542,000 units. Sales to dealers rose 0.2 per cent to 518,100 vehicles, signalling rising dealer inventories. To counter the trend, Peugeot will cut second-half production by 110,000 vehicles, or 8.3 per cent, from a year earlier. Inventory in the third quarter rose by 65,000 vehicles from a year earlier to 548,000 units.

Peugeot was fined by European Union regulators on October 5 for hindering cross-border car sales. The European Commission said Peugeot broke EU law by denying bonuses to Dutch dealers on sales to foreigners from 1997 to 2003.