* Germany provides legal basis for upgrading car exhaust systems
* Germany backs so-called retrofits as a way to avert diesel bans
* German cities forced to consider bans by February court ruling
* Auto industry says retrofits less effective than renewing fleet (Recasts, adds comment from BMW, Baumot)
BERLIN, Dec 28 (Reuters) - Germany on Friday cleared away legal hurdles for carmakers to upgrade exhaust emissions filtering systems on older diesel cars as a way to avoid vehicle bans, but failed to quell doubts among manufacturers and suppliers over the effectiveness of retrofits.
Carmakers have been forced to consider upgrading exhaust treatment systems on older cars after German cities started banning heavily polluting diesel vehicles to cut pollution from fine particulate matter and toxic nitrogen oxides.
The fight over refits is the latest fallout from an emissions cheating scandal triggered by Volkswagen in 2015 after it admitted systematically hiding illegal pollution levels from regulators.
An environmental and regulatory backlash ensued and lawmakers and the auto industry are now at odds over how to clean up dirty air in inner cities.
Carmakers want customers to buy new cars with cleaner engines, while environmentalists and consumer groups argue that retrofitting older vehicles may be more cost-effective.
The transport ministry on Friday released a 30-page document setting out guidelines for getting regulatory approval to install upgraded exhaust filtering systems on older cars.
"Now it is the turn of the retrofit industry to develop effective systems to meet all limits and regulations," transport minister Andreas Scheuer said in a statement.
The Federal Motor Transport Authority would grant approval quickly so that the retrofit systems could be offered on the market as soon as possible, he added.
Baumot Group, which makes exhaust filtering upgrade kits, welcomed the guidelines. "Under a normal vehicle certification process, we believe we can deliver our system in 2019 in a timely fashion," said Marcus Hausser, the company's chief executive.
German auto lobby group VDA, however, said that customers should buy new cars rather than spend money on installing new exhaust filtering mechanisms on older vehicles.
"We cannot give a guarantee for a vehicle in which third-party exhaust purification systems have been retrofitted," VDA president Bernhard Mattes told Die Welt newspaper. "If a customer has his vehicle modified, then he and the retrofitter are responsible for any consequential damage."
German environmental lobby group Deutsche Umwelthilfe (DUH) won a landmark ruling in February to force diesel bans after it sued cities that failed to meet clean air rules.
Cities have considered banning older vehicles which do not conform to the latest Euro 6d engine emissions standards.
Hamburg has banned older diesel cars from the city centre, and other cities, including Berlin and Stuttgart, the home of Germany's car industry, are set to introduce similar bans.
Of the 15 million diesel cars on Germany's roads, only 2.7 million have Euro-6 technology. Evercore ISI has estimated that upgrading the exhaust cleaning of just the Euro-5 fleet could cost up to 14.5 billion euros ($17.9 billion).
German carmakers have already agreed to spend up to 3,000 euros ($3,431) per vehicle to upgrade engine management software to make exhaust filtering systems more effective, but environmentalists say these measures are insufficient.
Carmakers are divided over who will pay the retrofit costs, given that most older diesel cars met clean air rules at the time when they were sold.
Volkswagen and Daimler announced they would cover some retrofit costs, while rival BMW has refused, only proposing incentives to trade in old vehicles for new ones.
Volkswagen said on Friday that customers may not benefit from installing new exhaust systems on older cars.
"All concepts known to us to date have disadvantages for our customers, such as increased fuel consumption and thus increased CO2 emissions and, in some cases, reduced performance," VW research and development head Frank Welsch said in a statement.
BMW said exhaust system upgrades that would not penalise fuel consumption or cause additional wear and tear could take up to three years to develop and certify.
Selling newer cars through incentives combined with the ramp-up of electric car charging infrastructure would bring down pollution levels in inner cities much faster than trying to retrofit older vehicles, BMW said on Friday.
Supplier Continental supported the carmakers' critical stance. A spokesman said developing retrofits for each model would be extremely costly and time-consuming.
Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centres by 2025, while the mayor of Copenhagen wants to ban new diesel cars from entering the city as soon as next year. France and Britain will ban new petrol and diesel cars by 2040. ($1 = 0.8742 euros) (Reporting by Arno Schuetze, Paul Carrel, Hans Seidenstücker, Jan Schwartz; writing by Edward Taylor; editing by David Evans and Adrian Croft)