South Korea has announced tax cuts to spur car sales during the economic slump but urged automakers to respond with a cost-cutting drive.

From 1 May to the end of the year, consumers will be given a 70% cut in taxes when they replace cars registered before January 1, 2000, with new models, the Ministry of Knowledge Economy told AFP.

The reduction would help the industry, which faces sagging demand at home and abroad, boost sales by up to 5.5m units, the ministry said. Both private and company cars would benefit.

South Korea's vehicle production fell 15% in February year-on-year, the ninth consecutive monthly decline, according to the Korea Automobile Manufacturers Association.

President Lee Myung-Bak promised additional support measures, saying automakers have "a great impact on the overall industry and can create many jobs."

Knowledge economy minister Lee Youn-Ho said the government would create funds to support research and development of fuel-efficient or eco-friendly cars and to help parts makers.

But he urged the industry to step up a cost-saving campaign and improve labour relations.

"If carmakers are slow to change, the proposed support may be of limited scope or withheld, depending on circumstances," he said.

Lee, quoted by Yonhap news agency, said the average salary of Korean workers at Hyundai Motor was higher than that of American employees at its Alabama factory, even though their productivity lagged the US plant.

Yonhap said the government may consider offering subsidies to help car owners scrap old vehicles, while slashing environmental protection charges on diesel vehicles.