May auto sales are expected to show a big improvement over last year's dismal levels, but the recent gyrations on Wall Street appear to have tempered car buyers' hopes that the U.S. economy was out of the woods, The Detroit News reported.

"There was a lot of extreme volatility in the financial markets in May, which caused consumers to hesitate," said Jesse Toprak, analyst at the pricing firm TrueCar.com.

He predicts sales will total 1.05 million cars and light trucks, up 13.6 percent from May 2009 when the industry was deep in the doldrums, with uncertainty about the fate of Chrysler LLC and General Motors

But a recent recovery in demand appears to have lost some momentum, Toprak said. He expects the selling pace in May to have slowed to 11 million vehicles, on an annualized basis, from 11.2 million in April and 11.8 million in March.

Other May estimates are higher, but only slightly. Automotive research site Edmunds.com predicts the seasonally adjusted annualized rate (SAAR) of sales will be 11.4 million, while Bank of America -- Merrill Lynch's forecast is for a 11.3 million SAAR. Citigroup's Citi Investment Research estimates this month's selling rate at 11.2 million vehicles -- level with April.

Still, the comparison with last May will show a dramatic recovery from the treacherous environment in the first half of 2009.

Edmunds estimates double-digit gains for all the major players except for Toyota Motor Corp., which it predicts will show a year-over-year sales increase of only 7.5 percent.

The final result will hinge on the turnout for the traditional Memorial Day sales. Forecasts are calling for fine weather in most regions of the country.

"This month hasn't been particularly good for the car business so far, but we anticipate that the holiday weekend will more than make up for it," said Jessica Caldwell, director of industry analysis at Edmunds.

Longer term, demand is expected to recover because the average age of American vehicles is approaching 10 years, which is historically very old. Several surveys suggest that pent-up demand is building, Citi said in a research note.

"Precisely timing the inflection point of the cycle is challenging since vehicle purchasing can be deferred now more than ever -- cars last longer, households (are) more saturated -- creating an unusually high margin of error," wrote Citi analyst Itay Michaeli. "The recovery largely becomes a question of when, not if."

Automakers are responding to the near-term skittishness provoked by the dizzying drops on Wall Street by keeping incentives high.

Toprak estimates incentives this month will average $2,915 per vehicle, up 8.3 percent from April levels and 1.7 percent above year-earlier levels.

"Automakers realize that a lot of consumers are hesitant," he said. "Demand is still very fragile, and incentives done correctly are still an effective way to get people into showrooms."