Honda Motor Co. posted a better-than-expected 6.5 per cent rise in quarterly operating profit, helped by solid Japanese and US sales and lifted its full-year forecast to account for a stronger dollar.

After a year of muted growth in its most important US market, Japan's third-biggest auto maker - also the world's top motorbike manufacturer - expects healthier sales in the year ahead on the back of a full remodelling of its popular Civic sedan and increased production of light trucks.

But Honda warned that an escalating price war at the US Big Three - General Motors Corp., Ford Motor Co. and DaimlerChrysler's Chrysler unit - meant its spending on discounts and other sales incentives would likely rise too, pressuring profitability.

"GM's strategy of offering employee discounts to customers has led to an unexpected scale of rises in incentives," Executive Vice President Satoshi Aoki told a news conference.

"This is affecting our business too... and we're now expecting to spend a little more on incentives than we originally planned."

Aoki said Honda now expected to dish out £350 per vehicle this year - more than the $480 projected in April but flat from last year. With increased US sales volumes, such spending would rise $200 million to $890 million for the year, Honda said.

But the outlays on margin-eroding incentives at Honda and domestic rivals Toyota Motor and Nissan Motor are nowhere near the levels at GM and Ford, which posted dismal results last week due to losses at their automotive operations.

Honda's rosy earnings came a day after Nissan reported a 10.7 per cent rise in quarterly operating profit also due to brisk US sales, highlighting the gap in fortunes between Japan's healthy auto makers and their struggling US counterparts.

"The results show that even facing higher raw materials prices and rising North American sales costs, solid companies can offset these and grow their earnings," said Kurt Sanger, auto analyst at Macquarie Securities.

Honda reported an operating profit of £870 million for the first quarter ended in June, better than the consensus of 161.16 billion yen in a survey of seven brokerages by Reuters Estimates.

For the year to March 2006, it expects a profit of 665 billion yen instead of a previously estimated 650 billion, assuming a stronger dollar at 106 yen instead of 105 and better global car sales. After averaging 108 yen in the last quarter, the dollar is in the mid-112 level, leaving more upside for Honda's bottom line. Honda took a more conservative euro assumption, at 132 yen for the year instead of 135, even as the euro trades around 135 yen.

First-quarter net profit fell 3.1 per cent to 110.67 billion yen against a consensus estimate of 114.35 billion yen. First-quarter profits were mainly underpinned by cost cuts and a sales rise in all regions.

Domestic car sales grew 8.8 per cent to 840,000 units thanks to brisk demand for its new minivans such as the Step Wagon and Airwave. Overseas sales rose 8.9 percent to 673,000 units, with the Ridgeline pickup, Pilot and Acura RL driving US sales.