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(Adds VW layoffs, context on auto market)
SAO PAULO, Jan 6 (Reuters) - Auto sales in Brazil are likely to fall for the third straight year in 2015, dealership association Fenabrave forecast on Tuesday, due to rising interest rates, weak consumer confidence and the end of long-running tax breaks.
Fenabrave expects sales to slip 0.5 percent this year after a 7.2 percent drop in 2014, the Brazilian auto market's worst decline since 2002. A 0.9 percent decline in 2013 was the market's first drop in a decade.
The ongoing contraction threatens to drag on Brazil's stagnant economy for another year, triggering layoffs and creating headaches for President Dilma Rousseff at the start of her second term.
Volkswagen AG started the year by laying off 800 workers at a plant outside Sao Paulo, according to VW and union officials. Workers have responded by declaring an indefinite strike at the factory, a union representative told Reuters.
A VW spokesman declined to comment on the strike, adding that job cuts announced Tuesday were the first step toward trimming payrolls at the plant and further measures were still pressing.
Payrolls in Brazil's auto industry had already shrunk 7 percent in the 12 months through November, according to carmakers' association Anfavea, putting pressure on Rousseff and her Workers' Party, which relies on strong union support.
To keep assembly lines running, Rousseff has resorted to a series of temporary tax breaks since 2012, striking a gentleman's agreement with automakers to hold back on widespread layoffs. A robust job market has been one of the few highlights for Brazil's stagnant economy over the past few years.
However, the tax breaks have drained billions from a strained federal budget and Rousseff let them expire this month.
Layoffs are one of the few ways to restore profits for global automakers with major local operations, such as Germany's Volkswagen, Italy's Fiat Chrysler Automobiles NV and U.S.-based General Motors Co and Ford Motor Co.
Fiat remained Brazil's top seller of cars and light trucks in 2014, with nearly 698,200 new registrations.
GM stole second place from VW by selling almost 578,800 passenger vehicles, just ahead of about 576,600 cars and light trucks for its German rival. Ford sold over 308,100 vehicles. (Reporting by Alberto Alerigi Jr.; Writing and additional reporting by Brad Haynes Editing by W Simon)