PARIS/BEIJING (Reuters) - French carmaker PSA Group (>> Peugeot) posted a first-half decline in global sales on Tuesday, with deliveries plunging almost 20 percent in China as the fast-changing market shunned its Peugeot, Citroen and DS cars.

The Paris-based company recorded a stronger performance at home in Europe, while warning that regional demand will likely suffer in the wake of Britain's June 23 referendum vote to leave the European Union.

PSA's total sales fell 0.2 percent to 1.54 million vehicles, slipping behind domestic rival Renault (>> Renault) as its setback in China highlighted the challenging conditions faced by western mid-range car brands in the world's biggest market.

"In China we're in the process of adapting to a fast-changing market," PSA Europe Director Denis Martin told reporters on a conference call.

The Chinese market has stalled in the biggest population centres including Beijing and Shanghai, where congestion and pollution have brought new traffic and ownership restrictions, leaving growth in demand to smaller cities where SUVs built by lower-cost Chinese brands are favoured.

Some foreign carmakers are responding with new locally branded products with their Chinese joint ventures, such as General Motors' (>> General Motors Company) Baojun and the Venucia brand owned by Nissan (>> Nissan Motor Co Ltd) and Chinese partner Dongfeng Motor Corporation  (>> Dongfeng Motor Group Co. Ltd).

By 2020 about 3.2 percent of China's market will be claimed by new local brands created with global partners over the preceding decade, forecaster IHS Automotive predicts.

"We've been seeing a strong demand shift towards smaller SUVs in more rural areas, and the local guys had more affordable product," said Arndt Ellinghorst, an analyst with Evercore ISI who has a "sell" rating on PSA's shares.

"Others have recovered pretty well, so it's a bit surprising to see Peugeot still suffering this much," he said.

PSA has plans for a new product offensive in China which includes five four-by-four offerings.

But its fledgling Fengshen badge has so far been left behind in the rush and is still carried on only a handful of models, although it is shared with Dongfeng, which took a 14 percent stake in PSA as part of the French carmaker's government-backed rescue from the brink of bankruptcy in 2014.

PSA also lacks a modern low-cost vehicle architecture in its Chinese plants, with its new CMP small-car platform not due until 2018-19.

Meanwhile back in Europe, PSA's first-half sales rose 7.4 percent, led by the Peugeot 2008 mini-SUV and Partner delivery van although Martin said the European market may suffer a "slight slowdown" following Britain's vote to leave the European Union. However, he maintained the company's forecast for 4 percent growth for the full year.

Peugeot's shares were up 5.3 percent at 11.77 euros by 1138 GMT in an overall higher market.

The company is due to publish its first-half earnings on July 27.

(Additional reporting by Gilles Guillaume; Editing by Andrew Callus, Greg Mahlich)

By Laurence Frost and Norihiko Shirouzu