(Corrects period affected by output increase in second paragraph to May-August from January-August)
By Laurence Frost
PARIS, April 21 (Reuters) - PSA Peugeot Citroen announced a 10 percent European production increase on Tuesday as returning demand boosts the troubled French carmaker a year into a major turnaround plan.
Paris-based Peugeot said it would increase May-August output by 60,000 vehicles in response to an upturn in European registrations that could make recovery goals announced by Chief Executive Carlos Tavares look too conservative.
Europe's auto market expanded 10.8 percent in March from the same month last year, and appeared to gain a firmer footing with mid-market brands, like Peugeot and Citroen, outpacing no-frills "crisis cars" that did well during the downturn.
After years of losses led to a 3 billion euro ($3.2 billion) bailout last year that saw the French government and China's Dongfeng buy 14 percent stakes, Peugeot pledged under its new CEO to return to a 2 percent operating margin by 2018.
Analysts broadly welcomed the plan, while many suggested Tavares could do better, and claimed partial vindication when Peugeot met its cash-flow goal four years early.
Under its "Back in the Race" plan, Peugeot is cutting labour costs and inventory while trimming model lineups to focus on more profitable vehicles. The group's European car market share fell a half-point to 10.6 percent in the first quarter.
The upturn in demand increases the prospect that Tavares may need to upgrade his profitability goals before long.
"We were working with the hypothesis of a flat European market in 2015," Peugeot manufacturing chief Denis Martin said in an interview on Monday.
"If volumes are better then of course it's more favourable and may indeed allow us to hit our Back in the Race targets faster than expected."
Peugeot said its production hike was a response to strong orders for models including the restyled 208 subcompact and Citroen C4 Cactus, a low-powered, high-style urban SUV.
Buoyant sales of delivery vans, a big profit centre for Peugeot and French rival Renault, have also prompted output increases at plants like Sevelnord in northern France, where Peugeot is adding a night shift.
Despite the upturn, the company is not letting up on its determination to slash fixed costs and find productivity gains, Martin said.
"The fact that Europe is back in volume growth is not going to make us lose our heads," he said. "Our results are not driven by volume but by the structural action we've been taking since." ($1 = 0.9311 euros) (Additional reporting by Gilles Guillaume; Editing by Chris Reese)