LONDON, April 27 (Reuters) - British car production rose to a 17-year high in the first three months of 2017, as rising overseas demand offset weaker appetite from domestic car buyers, the country's automotive industry said on Thursday.
Car production has been one of the strongest areas of British manufacturing in recent years, bolstered by heavy foreign investment and a recovery in global markets, but the industry fears a hit when Britain leaves the European Union.
More than three quarters of cars produced in Britain are exported, and overseas demand grew 7.6 percent in the first three months of 2017 versus a 4.3 percent fall in domestic demand, the Society of Motor Manufacturers and Traders said.
In March alone British car makers produced 170,691 vehicles, 7.3 percent more than a year earlier and the highest number for any month since March 2000. This took first quarter output to its highest since 2000 as well, with 471,695 cars manufactured.
Sterling has fallen sharply since June 2016's vote to leave the EU, giving British exporters a temporary cost advantage - though in the automotive sector much of that is mitigated by heavy use of imported components.
"UK car manufacturing is accelerating thanks to billions of pounds of investment committed over the past few years," SMMT chief executive Mike Hawes said.
The SMMT expects British annual car production to beat its all-time peak of more than 2 million in 2020, if Britain retains easy access to European markets after Brexit.
"Much of our output goes to Europe and it's vital we maintain free trade between the UK and EU or we risk destroying this success story," Hawes said. He added that he was also concerned about possible measures to penalise diesel cars, which made up almost half of production.
Separately, the Confederation of British Industry said the government needed to focus on reaching a trade deal with the EU in the two years that remain before Britain leaves, rather than arguing over an exit bill that is likely to cost tens of billions of euros.
"For both sides, leaving the negotiating table without a deal shouldn't be 'Plan B' but 'Plan Z'. Whether it's tariffs or regulation, a no deal scenario would have chilling effects on both sides of the Channel," CBI director-general Carolyn Fairbairn said.
Prime Minister Theresa May, who is seeking a strengthened negotiating mandate in a national election on June 8, has not ruled out walking away from an inadequate deal with the EU. (Reporting by David Milliken, editing by Andy Bruce)