NEW YORK (Reuters) - The global generic drugs sector has had its largest year of deal-making, but industry leaders expect the pace of consolidation to accelerate as pricing pressures force more firms to scale up.

Around the world, cheap generic medicines find themselves in a sweet spot as governments promote their use in order to cut costs, and increasing numbers of branded blockbuster drugs lose patent protection.

But growing popularity has also spawned growing competition. Prices of generic, or unpatented, medicines have tumbled in major markets as more manufacturers, especially from India, enter the business.

After double-digit percentage price increases earlier in the decade, prices in the United States -- home to more than half of industry revenues -- actually fell last year.

It is this combination of growth opportunity and margin pressure that is obliging more and more companies to seek economies of scale.

"We will see more consolidation and I strongly believe that within the next four to five years we will see only a few global players controlling the generics market," Robert Wessman, chief executive of Iceland's Actavis, told the annual meeting of the International Generic Pharmaceutical Alliance in Malta. "I expect to see fewer and fewer local or regional players."

His firm has made 20 acquisitions in the last six years, of which the largest was a $600 million deal in May to buy U.S. group Amide Pharmaceutical Inc.

Although big by generics standards, that transaction pales in comparison to Novartis's (up $0.75 to $48.60, Research) agreement in February to acquire Germany's Hexal and Eon Labs (down $0.04 to $30.61, Research) of the U.S. for more than $8 billion.

Both Sandoz, the generics arm of Novartis, and Israel's Teva Pharmaceutical Industries (up $0.18 to $32.16, Research) are extending their lead over rivals as the world's top two generic firms -- a fact that is adding pressure on smaller players to catch up.

Indian firms, in particular, are becoming more aggressive in their global ambitions, as highlighted by this week's planned purchase by Matrix Laboratories to buy a controlling stake in Belgium's Docpharma for up to $238 million.

It is the biggest foreign acquisition yet by an Indian generics manufacturer -- but it is unlikely to be the last.

"We are seeing the Indian firms beginning to step up to the plate in a big way now," said Tommy Erdei of ABN AMRO, whose bank advised Docpharma.

But China is hot on its heels, pointing to an increasingly tough competitive environment in the years ahead.

"The pricing competition is being driven by a huge overcapacity in the market because of all the investments that have been made in India and are going to be made in China," Frank Condella, European head of operations at Ivax (up $0.31 to $21.69, Research), told this week's meeting.

The answer, he said, could be more alliances between developed market leaders and low-cost producers.