* Q1 group sales may shrink 1-3 pct
* Q1 Europe, NAFTA car production to drop about 8 pct
* CEO reiterates 2013 sales target above 34 bln eur
* Proposes record 2.25 eur dividend vs poll avg 1.98 eur (Adds detail and background)
FRANKFURT, March 7 (Reuters) - Continental AG, Germany's biggest tyre maker, is bracing for lower first-quarter sales as slumping auto demand in Europe and a weaker development in North America hurt car production.
Group sales at the Hanover, Germany-based company may shrink between 1 and 3 percent in the January-March quarter, Chief Executive Elmar Degenhart said on Thursday.
He predicted auto production in core European markets and the NAFTA region covering the United States, Canada and Mexico would drop by about 8 percent.
"2013 got off to a difficult start," Degenhart said at a news conference presenting its 2012 results.
The European car market is near a 20-year low as the euro zone debt crisis and government austerity measures sap consumer demand.
Continental expects car production in the region, where it generates about half of its sales, to fall by 12 percent in the first quarter.
Still, the tyre maker's full-year sales may increase by about 5 percent to more than 34 billion euros ($44 billion) as global production of passenger cars is seen inching up to 82.5 million vehicles from 81 million, Degenhart said, reaffirming a target given in January.
Adjusted for workdays, first-quarter group sales may even be flat, the CEO said, noting that last year's first three-month period contained three more workdays.
Degenhart said the company remains confident about prospects for 2013 and coming years, pledging to hold its operating profit margin above 10 percent after attaining 10.8 percent in 2012.
The German group, which also makes auto parts, proposed to pay shareholders a record dividend of 2.25 euros per share for 2012, beating an analyst forecast of 1.98 euros, helping push its shares up by 4.4 percent to 98 euros by 0835 GMT.
$1 = 0.7692 euros Reporting by Andreas Cremer; editing by Peter Dinkloh and Jason Neely