* Volvo adds new smaller car to product range
* Offers customers option to pay by subscription
* Enters crowded but growing sector (Adds quotes, details)
By Agnieszka Flak
MILAN, Sept 21 (Reuters) - Volvo Cars showed off its first compact SUV on Thursday with the launch of its XC40 model, the latest in a sweeping overhaul of the carmaker's line-up under Chinese ownership.
Volvo will seek to emulate the success of its larger XC90 and best-selling XC60 SUVs, which have put it on course for a fourth straight year of record sales.
The XC40, which will first be produced at Volvo's plant in Belgium and later also in China, is a direct competitor to the Audi Q3, BMW X1, Mercedes GLA and the Jaguar E-PACE.
Deliveries in Europe will start in the middle of the first quarter of 2018, in the United States by the end of March and in China by early May. In Germany the model will have a starting price of 31,350 euros ($37,354).
The XC40 will also launch Volvo's new subscription service, under which customers can pay a flat fee per month - in Europe of 699 euros ($833) - and get a new car every 24 months, just like with a mobile phone.
Since it was bought from Ford by Zhejiang Geely Holding Group in 2010, Volvo has taken on larger rivals such as BMW and Daimler's Mercedes-Benz with new, more upmarket models.
"The XC40 is our first entry in the small SUV segment, broadening the appeal of the Volvo brand and moving it in a new direction," CEO Hakan Samuelsson said.
SUVs have been growing in popularity and are expected to make up almost half of all sales within the C, mid-size segment by 2020, data from IHS Markit shows, compared with just 20 percent a decade earlier.
"The XC40 is entering a crowded segment, but it's a segment that's still growing," said Ian Fletcher, an automotive analyst at IHS Markit.
Volvo will be trying to appeal to customers looking for a high driving position, practicality and muscular looks of an SUV but with modest off-road capabilities and better efficiency.
"Volvo is ploughing its own furrow and is trying to offer an interesting alternative to the German carmakers," Fletcher said.
"This will appeal to city dwellers, people looking for some aspects of an SUV but with the cool Volvo styling."
Fletcher sees the XC40 selling around 100,000 units next year, rising to just under 120,000 the following year.
The XC40 will edge Volvo closer to its medium-term sales target of 800,000 cars, up from 534,332 last year and is the first model to come off a new modular vehicle architecture (CMA), which was developed with Geely in a bid to keep down costs and boost flexibility.
The Gothenburg-based company said in July all of its models launched after 2019 would be electric or hybrids.
After struggling under Ford, the comeback at Volvo has prompted market speculation of a potential initial public offering. Samuelsson reiterated a listing was "an option for our owner" but right now the company was not preparing an IPO. ($1 = 0.8393 euros) (Reporting by Agnieszka Flak; editing by Alexander Smith/Keith Weir)