New car sales fell by 11.5% to 128,811 last month compared with January 2010, new figures showed today.
The Society of Motor Manufacturers and Traders said the decline was in line with its forecast and partly reflected the ending of the car scrappage scheme.
Its figures also revealed that the market share for cars with lower CO2 emissions continued to increase, rising by more than 65% in January.
SMMT chief executive Paul Everitt said January's fall in new car sales marked the beginning of a challenging year for the UK motor industry, adding: "Consumer confidence is low and it is important that Government uses the March Budget to help relieve some of the financial pressure on motorists by freezing fuel duty, while providing stability and certainty on motoring taxes.
"Despite the challenging conditions, the demand for low CO2 emitting and highly fuel-efficient cars continues to grow."
Just over 65,000 new diesel cars were sold in the UK last month compared with almost 62,000 petrol models, said the SMMT.
New car registrations have now fallen for seven months in a row following January's 16,668 reduction in sales.
The SMMT said last month's rise in VAT to 20% also had an effect on sales, as well as uncertainty over the economy, although the industry group mainly blamed last year's ending of the scrappage scheme, under which motorists were offered a discount on new cars for trading-in older models.
In January last year, almost one in five new cars were sold through the scrappage scheme, and the SMMT said it expected the knock-on effect to hit the market during the first six months of 2011.
Total sales volumes are now forecast to fall by 5% this year, to 1.93 million.
Private car sales showed the steepest decline last month, although fleet and business sales were also down.
Demand for smaller cars, a market particularly boosted by the scrappage scheme, fell sharply last month, while the executive, luxury and dual purpose sector recovered strongly, said the SMMT.
UK-built cars took a 12.9% share of the market, unchanged from a year ago, while alternative fuelled vehicles matched their record share of 1.4%.
The Ford Focus was the best selling new car last month with 7,582 registrations, followed by the Ford Fiesta (5,844), Vauxhall Astra (4,510), Vauxhall Corsa (4,363), VW Golf (4,110), BMW 3 Series (3,184), VW Polo (3,010), Vauxhall Insignia (2,236), Peugeot 207 (2,171) and Nissan Qashqai (2,108).
David Raistrick, of professional services firm Deloitte, said the figures were "disappointing but not surprising", adding: "This time last year, the scrappage scheme was in place so we are not really comparing like with like.
"Compared with January 2009, last month's figures actually increased by around 15%; however, it should be remembered that 2009 was the point at which the industry was crying out for help.
"Nevertheless, 2011 will be tough for motor manufacturers. We do not expect sales to go beyond 1.9 million and they may struggle even to reach 1.85 million, which would be one of the lowest new vehicle sales years in the last decade.
"Public sector buying is reducing and private consumers are keeping their cars for longer."
Friends of the Earth's transport campaigner, Richard Dyer, said: "It's great news that average new car emissions have fallen slightly, but action to tackle rising fuel prices and transport's contribution to climate change has been stuck in the slow lane for far too long.
"Ministers and the motor industry must accelerate action to wean our cars, vans and lorries off their addiction to oil.
"The Government and EU must do far more to persuade motorists to use greener forms of transport to move around and cleaner cars when they drive, and motor manufacturers must cut new car emissions much faster if they are to be a driving force in building a low-carbon future."