TOKYO: Toyota said Thursday it returned to a profit in the latest quarter as government incentives boosted sales, leading the world's largest automaker to trim its projected red ink for the year.

Toyota Motor Corp. reported a 21.8 billion yen ($242 million) profit for the July-September period after three straight quarterly losses.

That marked an 84 percent plunge from the 139.8 billion profit racked up the same period a year ago, but underlined a gradual recovery for Toyota, which sank to its worst loss for the fiscal year ended March 31.

The news marked the latest in a series of recoveries for Japanese automakers. Rivals Honda Motor Co. and Nissan Motor Co. have both recently reported healthier earnings after taking a battering from the global economic crisis.

Toyota said it now expects to sell more vehicles for the fiscal year through March 2010, raising its projections to 7.03 million vehicles from 6.6 million.

The company, which makes the Prius hybrid and the Corolla subcompact, said sales in the last six months were proving better than earlier expectations as government stimulus measures around the world spur sales.

As a result, the company forecasts a smaller loss for the fiscal year of 200 billion yen ($2.2 billion) much better than the 450 billion yen ($5 billion) of red ink it had predicted earlier.

If Toyota can manage the latest forecast, it would be major improvement over the 437 billion yen loss it posted during its last fiscal year, the worst performance in the company's 72-year history.

For the latest quarter, Toyota recorded 4.542 trillion yen ($50 billion) in July-September sales, down 24 percent from the same period a year earlier.

Despite the results, Toyota is still struggling.

In a tearful news conference Wednesday, Toyota pulled out of expensive but glamorous Formula One racing, acknowledging it has to focus on its core car business.

Meanwhile, the company faces an investigation by American authorities into problem floor mats, suspected of jamming the gas pedal and possibly causing crashes. A recall would affect 3.8 million vehicles, including the top-selling Camry sedan, and is already endangering Toyota's pristine reputation for quality.

On the bright side, Toyota is benefiting from strong sales in China and other emerging markets, although that has yet to offset completely flagging sales in the key North American market.

Demand is also surging in Japan for its Prius hybrid, which is tax free because of a government stimulus measure that saves the buyer thousands of dollars (tens of thousands of yen).