(Adds consumer, industry and analyst comments)
By Georgina Prodhan
LONDON, June 30 (Reuters) - Britain's competition watchdog launched an investigation on Monday into whether dealer warranties on new cars distort the five-billion-pound ($8.25 billion) annual market for vehicle servicing and repairs.
In addition to the manufacturer's guarantee new cars in Britain are often sold with an extended warranty from the dealer, but these are normally invalidated if the car is serviced anywhere outside the manufacturer's network.
"Our study will look at how the car servicing market is affected by the warranties offered with new cars, particularly when servicing is tied to a franchised network. It will examine the pros and cons for purchasers," Office of Fair Trading (OFT) chairman John Vickers said in a statement.
Motor industry analyst Garel Rhys of Cardiff University Business School said: "The whole thing about extended warranties is a bit like air miles. The potential to stop the free play of market forces is huge."
The total UK car servicing industry is worth about five billion pounds a year and the OFT said franchised servicing agreements through official dealerships accounted for one billion pounds of this market.
The OFT's move was welcomed by the UK Consumers' Association. "We think it's good news. We do get lots of queries about extended warranties and the fact they're tied into particular dealers," said a spokesman.
"Consumers vote with their feet. Once a car is out of warranty period they go elsewhere," he said, adding that franchised dealer prices could be 50 percent higher than those of independent garages.
"NOTHING TO HIDE"
Rhys said manufacturers might try to protect their profits by extending their own warranty periods to ensure spare parts would still have to be bought through them, regardless of which garage cars were taken to -- South Korean automaker Hyundai has already extended its warranties to five years.
"The spare parts business can very often be the most profitable part so they are very eager indeed to maintain control of that area," he said.
But Britain's Society of Motor Manufacturers and Traders denied that carmakers were likely to resort to such measures.
"It's more of a risk to the industry to put out longer warranties because you're opening yourself up to the risk of more expenditure," a spokesman said.
The trade association said it welcomed the inquiry, saying it had "nothing to hide".
"We're fairly relaxed about the whole situation. We're confident when they look at it they'll be happy about what we're doing," the spokesman said.
The Office of Fair Trading recently carried out a 10-month probe into extended warranties for electrical goods -- and concluded they were a rip-off.
The matter has now been referred to the UK's Competition Commission, which has the power to implement remedies where it judges that trade is being conducted unfairly and against the public interest.