"The car industry knows it has lost a lot of trust"
* Ministers, car bosses agree diesel pact to cut pollution
* Engine software to be updated on 5.3 mln cars in Germany
* Environmentalists seeking bans on diesel cars (Adds Justice minister comments)
By Emma Thomasson and Andreas Cremer
BERLIN, Aug 2 (Reuters) - German politicians and car bosses agreed on Wednesday to overhaul engine software on 5.3 million diesel cars to cut pollution and try to repair the industry's battered reputation.
However, environmentalists said the plan - almost two years after Volkswagen admitted to cheating U.S. diesel emissions tests - was too little, too late, and vowed to press ahead with legal action aimed at banning polluting vehicles.
Chancellor Angela Merkel's government has come under mounting pressure for not doing enough to crack down on vehicle pollution and for being too close to powerful carmakers.
The issue has become a central campaign topic ahead of next month's national election, prompting the government to summon car bosses to try to avert moves in some cities to force bans on diesel vehicles.
Justice Minister Heiko Maas said the agreement was only a first step, warning that bans on diesel vehicles could not be ruled out and urging car makers to focus more on consumers.
"The legal requirements for clean air remain in effect," he told Thursday editions of Germany's daily newspaper Bild.
Ministers have been wary of angering the owners of 15 million diesel vehicles and damaging an industry that is the country's biggest exporter and provides about 800,000 jobs.
Politicians stopped short of demanding costly mechanical modifications to engine and exhaust systems and said they had agreed for now on software updates for 5.3 million cars.
"We expect a new culture of responsibility from carmakers," Environment Minister Barbara Hendricks, from the centre-left Social Democrats, told a news conference, also adding the software updates were just a first step in cutting emissions.
"There is much to make good - to the environment, to people in cities, car owners and not least to the security of the car industry in Germany and its hundreds of thousands of jobs."
Hendricks criticised the VDA automakers lobby for putting out a statement proclaiming a deal two hours before ministers spoke to the media. She added the VDA's comment that the deal was "unique in Europe and the world" lacked humility.
The stakes have increased for German carmakers in recent weeks. Britain and France have announced plans to eventually ban all diesel and petrol vehicles and Tesla has launched its first mass-market electric car.
Meanwhile, top German manufacturers BMW, Daimler , Audi, Porsche and VW are being investigated by European regulators for alleged anti-competitive collusion.
LOST TRUST
The DUH environmental group said the initiative had failed as software updates would only result in a cut of about 2-3 percent of emissions of toxic nitrogen oxides (NOx), adding it would pursue court cases for diesel bans in 16 cities.
"Today's summit is bad news for hundred of thousands of people who will get sick and 10,600 who will die prematurely due to NOx each year," DUH head Juergen Resch said in a statement.
The VDA said the software updates should cut NOx emissions by 25-30 percent for those cars affected, reducing pollution at least as much as possible driving bans.
"The car industry knows it has lost a lot of trust. We must and will work on winning back that trust," VDA president Matthias Wissmann said.
Transport Minister Alexander Dobrindt said a refusal by foreign carmakers to participate in the plan was "completely unacceptable".
Carmakers also agreed to fund incentives aimed at encouraging consumers to trade in older diesel cars that cannot be helped with software updates.
The VDA said the software updates would cost VW, Daimler and BMW together at least 500 million euros ($593 million), while scrapping incentives would be much more expensive.
Evercore analyst Arndt Ellinghorst said the costs were manageable for the industry, but cautioned: "What the agreement doesn't do is restore consumer confidence in diesel engines."
German car sales data on Wednesday showed diesel car sales fell 12.7 percent in July. Now diesel makes up only 40.5 percent of new car sales in Europe's largest car market, down from 46 percent at the end last year.
An opinion poll published on Wednesday by Die Welt newspaper showed 73 percent of Germans want politicians to take a tougher line with the car industry on air pollution.
VW's emissions test cheating - which was exposed by U.S. regulators - led to a string of revelations that showed diesel vehicles from most manufacturers release far more NOx gases on the road than in laboratory tests used to assess their safety.
But cutting back on NOx pollution is causing another headache for carmakers, which were betting on diesel technology to help cut carbon dioxide (CO2) emissions to meet climate change rules. Diesel engines are up to 20 percent more fuel efficient than petrol equivalents.
Falling sales of diesel cars have led to an increase in CO2 emissions, Germany's KBA motor authority said on Wednesday. Average emissions per vehicle rose 0.4 percent in July to 128.4 grams of carbon dioxide per kilometre, it said.
($1 = 0.8427 euros)
(Additional reporting by Andrea Shalal and Edward Taylor; Editing by Keith Weir and Robin Pomeroy)
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