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* Dealers' association expects 8.05 percent rise from 2011
* Car sales jumped in August to all-time high
* Italy's Fiat held on to market leadership
SAO PAULO, Sept 4 (Reuters) - Brazil's car dealers' association raised its sales forecast for this year after data released on Tuesday showed that government tax breaks helped spur record sales in August, the latest sign that the country's economy is starting to rebound.
The association, known as Fenabrave, now expects sales to rise 8.05 percent in 2012 to 3.7 million vehicles, in sharp contrast to its previous forecast for a 0.4 percent drop.
Sales jumped last month as customers rushed to take advantage of a tax break for automobiles that was supposed to expire at the end of August. Sales in August surged 28.3 percent from the year-earlier period to an all-time high of 420,100 vehicles, Fenabrave said.
Last week, Brazil's government announced it was extending the tax breaks for locally made cars by two months to further bolster the economy. The tax breaks have allowed dealers to lower showroom prices.
The car industry makes up for more than 20 percent of Brazil's manufacturing sector, which has been struggling with high costs and a weak global economy. A rise in car output helped Brazilian industrial output post a modest gain for the second straight month in August.
Tax breaks have provided much-needed relief for the local auto industry after credit tightened and sales stalled in the first half. President Dilma Rousseff's government also capped imports from Mexico, the most protectionist shift in Brazil's auto sector since it opened up to imports two decades ago.
But production has been slow to recover as carmakers focus on clearing inventories and bracing for a potential hangover after the tax relief expires.
In the first eight months of the year, vehicles sales are up 5.5 percent to 2.5 million units.
Fiat held on to the top spot in Brazil's auto market in August, with sales of 98,200 cars and light trucks and a market share of 24.2 percent. Volkswagen followed in second place with sales of 88,760 vehicles and a market share of 21.9 percent.
General Motors was third with 75,860 vehicles sold and a market share of 18.7 percent, while Ford tallied 31,000 sales and a market share of 7.7 percent.
Brazil's carmaker association Anfavea will release its own data on car output and sales for August on Thursday.