Falling sales, costly gas, and financial gloom have cast a shadow over this year’s Paris auto show. Some of the facts are stark:

• U.S. car sales were down 27% in September to below 1 million - a 15 year low. Sales at every volume automaker were down.

• After years of losses, the last thing the big automakers need is a credit crunch. Even before the bailout, the government had approved an emergency $25 billion loan package to tide them over.

• Things aren’t any better in Europe. Mainstream automakers here expect to sales to fall up to 10% this year and 10-15% in 2009; they’re already planning or implementing production cuts.  August car sales in the UK were lower than at any time since 1966.

Those Americans who are buying are increasingly choosing smaller and more fuel efficient cars: in a U.S. light vehicle market down 11% for January to August 2008, sales for the Toyota Yaris, Nissan Versa and Ford Focus were up 32%, 13% and 26% respectively. Meanwhile in the premium sector, compact sedans fared best with downsizing buyers the likely reason: Audi A4 sales held close to last year’s sales number, while the newly updated Mercedes C-Class saw sales rise 42%.

Short Term Options Limited

Ford, GM, and others think this trend is here to stay: they’re developing new small cars intended for both Europe and the U.S. Dealers struggling to shift bulkier metal are likely to welcome these new vehicles as much as hard-pressed drivers burned by higher gas prices. Car buying may be driven by emotion, but it’s fuelled by cash flow.

The sticking point is that manufacturers’ short term options in the face of falling sales are limited: it takes 3-4 years to develop a new car. And although a clutch of new smaller cars has already arrived on U.S. shores, many are specialist models like the MINI and Smart that have done well, but are too esoteric to take a significant share of total sales.

Nevertheless, the relative success of the handful of more mainstream options like the Yaris, Honda Fit, and in the premium sector the BMW 1-Series does prove that there is a serious and growing market for smaller cars.

Europe Downsizes Too

Europeans, who already loved small cars, and appear even more worried about the environment than Americans, are themselves downsizing further, with more tiny ‘micro-compacts’ selling than ever.

We found ourselves wondering how many of these might — or ought to — be offered in North America. There are many candidates; some are more realistic than others. Here are a few of those that made the news in Paris:

The feisty-looking new Ford Fiesta has been well trailed already. A best seller in Europe since it was launched in the late ‘70s, it fits directly below the Focus.

How likely? It’s a near certainty. A concept was displayed at the Detroit show this year.

The new Ford Ka, smaller again than Fiesta, was unveiled in Paris.

How likely? Not very, at least for now. There are no U.S. plans for this today and it wasn’t engineered with U.S. standards in mind. Maybe if Fiesta becomes a runaway success it might be considered.

The BMW X1, still officially a concept at this show, is an SUV based on the 1-series that launched in the U.S. earlier this year. Automakers think that these mini-SUVs are the way forward: the flexibility, commanding driving position, and go-anywhere feel that buyers like, but in a small and efficient package. Plus they’re much more profitable than conventional subcompacts.

How likely? We’d put money on it. Americans like the 1-Series and they like SUVs.

The MINI Crossover Concept is another on the small SUV idea, only this brand is upsizing into the segment. A bit more fanciful, this concept had all sorts of wacky accoutrements but it’s not just for fun.

How likely? Very. Execs at MINI-parent BMW won’t be able to resist this one

Toyota iQ: Is the Yaris too big for you? This microcar is so small you have to choose between carrying rear passengers and luggage, but it has presence and manages 59 mpg with a conventional gas engine.

How likely? Don’t hold your breath, but wise people don’t bet against Toyota.

Toyota Urban Cruiser: Toyota’s take on the mini-SUV looks cute but has some real SUV chunkiness; don’t be fooled by the name into thinking it’s only good for cities, though.

How likely? Originally it was only intended for Europe, but Toyota’s U.S. operation is eyeing it hopefully. It might end up with a Scion badge.

Nissan NuVu: this is the kind of completely mad concept at which the Japanese excel: it even comes with its own tree. The “secret” electrical propulsion technology is as far down to earth as it gets, with a 75 mile range and 75 mph top speed.

How likely? Nissan promises a U.S. market car in 2010 with the no-gas-bills. Expect to see the small dimensions but not the weird styling.