By Jake Spring

BEIJING (Reuters) - The head of Volkswagen AG's <VOWG_p.DE> China operations said a planned expiry of tax breaks for small engine cars would hit its sales in the country next year, adding that the auto industry was keen to see an extension of the measure.

Last October, China cut sales taxes by half on cars with engines of 1.6 liters or less, a strong segment for Volkswagen, in a move to help stimulate the car market. That tax cut is set to expire at the end of 2016.

Helped by the tax cuts and signs that economic growth was not slowing as much as feared, deliveries for Volkswagen in China grew 6.8 percent in the first half after dropping 3.4 percent in 2015.

"If the government really stays on the present decision that this will be sharply stopped at the end of this year, you can expect pre-sales this year, with a bigger negative impact the first quarter of next year," said China CEO Jochem Heizmann.

"But let's see if this really stays this way."

Industry body China Association of Automobile Manufacturers (CAAM) said in June it favored making the tax cut permanent to promote fuel-efficient cars.

"Of course we are talking with the government, with CAAM. Everybody does see this risk so this is what I'm saying that hopefully things will change," Heizmann added.

The German automaker has slightly lagged the overall market, which grew 8.1 percent in the first half of the year, according to CAAM.

Heizmann said growth in the country's car market was expected to moderate in the second half after having outpaced forecasts in the first half.

(Reporting by Jake Spring; Writing by Adam Jourdan; Editing by Edwina Gibbs)