(Adds reason for warning, stock activity)

DETROIT, July 14 (Reuters) - Sonic Automotive Inc (SAH.N: Quote, Profile, Research), the No. 3 U.S. auto retailer, warned on Monday that its full-year earnings would be lower than previously expected due to significant declines in the new and used vehicle market.

Sonic, whose shares fell more than 12 percent in after-market trade, said the sales rate has trended significantly lower from what it expected when it set the original forecast, and markets are expected to remain difficult the rest of the year.

Automakers and dealers have seen U.S. light vehicle sales drop for a third consecutive year amid a weak economy, and consumer demand has shifted toward smaller vehicles and away from pickup trucks and SUVs due to soaring gas prices.

Sonic originally had expected U.S. sales at a 15.5 million annual rate in 2008. However, sales have trended far below that rate in recent months and analysts and automakers have cut their full-year estimates to about the 15 million range.

In June, for example, light vehicle sales dropped to a 13.6 million unit seasonally adjusted annual rate from 15.7 million a year earlier, the weakest result in 15 years.

The car retailer said its cash flow and liquidity remain strong, and it is actively reducing costs and taking steps to increase demand in the higher-margin segments of its business.

Sonic said it now expects earnings from continuing operations of $1.65 to $1.85 for the year, down from a prior forecast for $2.35 to $2.50 per share. Analysts on average expect Sonic to earn $2.21 per share for the year, according to Reuters Estimates.

Sonic said it expects second-quarter earnings of 48 cents to 50 cents from continuing operations, with the retail market for new and used vehicles lower than expected. Analysts expect the company to earn 55 cents per share in the quarter.

Sonic shares fell to their lowest level in more than seven years on Monday. In after-hours trade, the stock tumbled to $9.05 from its close at $10.30 on the New York Stock Exchange. (Reporting by David Bailey, editing by Mark Porter)