(Adds context, data on output and sales)
SAO PAULO, Feb 5 (Reuters) - Automobile production in Brazil expanded only slightly in January after a strike lowered output at Volkswagen's main plant in the country, while sales plunged after holiday promotions came to an end.
Automobile output advanced 0.4 percent in January from December, the nation's automakers association Anfavea said on Thursday while auto sales dropped 31.4 percent in the month.
The January figures come after a sharp sales increase in December driven by year-end sales events. Tighter credit and weak consumer confidence have also dragged on the market in recent months.
Production was affected by a 10-day strike at Volkswagen, which ended after the carmaker agreed to reverse the layoff of 800 employees.
Unsold inventory at show rooms and factory lots fell to about 318,500 vehicles in January, down from 351,000 in December.
The auto industry, which contributes a quarter of Brazil's industrial production, has become a persistent headache for recently re-elected President Dilma Rousseff. Targeted stimulus since 2012 gave sales a temporary boost, but it has proven tough to wean companies off the tax breaks as the nation looks to improve its fiscal accounts.
Brazil is one of the world's five biggest auto markets and a major base of operations for Italy's Fiat Chrysler Automobiles NV, Germany's Volkswagen AG and U.S.-based General Motors Co and Ford Motor Co.
Fiat remained Brazil's top seller of cars and light trucks in January, with over 49,650 new registrations, while GM took second place, selling about 46,900 passenger vehicles. VW's sales came to 39,462 cars and light trucks. Ford sold around 24,900 vehicles.
Overall, automakers in Brazil produced about 204,800 new cars, trucks and buses last month, while sales totaled around 253,800 vehicles, according to data released by Anfavea. (Reporting by Alberto Alerigi Jr.; Writing by Asher Levine Editing by W Simon)