Passat's December U.S. sales of 14,462 set a monthly record since production began in Chattanooga with fleet sales helping bolster that figure, according to VW.
Dale Smith said it's not unusual to see people coming to his Chattanooga dealership with 200,000-mile, 10-year-old cars who've been waiting to trade.
"There's still a lot of pent-up demand," said Smith, general manager of Village Volkswagen. "They've been waiting for the economy to improve."
Total U.S. auto sales hit a five-year high in 2012 as all the major automakers posted annual sales gains Thursday.
The Volkswagen brand had a 35 percent jump over 2011 to 438,133 vehicles to lead the major car companies.
The Chattanooga-made Passat helped fuel VW sales, with the midsize sedan hitting an all-time annual record about 50 percent higher than the former peak in 2001.
Volkswagen sold 117,023 Passats for 2012, and it posted a banner month for December with sales of 14,462. Passat sales in 2012 were more than four times greater than in 2011, according to the automaker as the company ramped up production of the redesigned vehicle aimed at better appealing to American motorists.
Volkswagen Group of America Chief Executive Jonathan Browning said 2012 was "clearly a year of strong growth" and VW's best year in the U.S. since 1973.
Browning urged caution this year, but he expects VW to beat the overall industry in sales for 2013.
Other automakers with assembly plants in Tennessee also saw increases in 2012.
Sales of Nissan, with an assembly factory in Smyrna, Tenn., and an engine plant in Decherd, Tenn., grew about 10 percent.
Ken Hunt, owner of Hunt Nissan in Chattanooga, said new car sales are "clawing back" to prerecession levels. Nationally, the Nissan brand topped 1 million in annual sales for the first time in 2012.
General Motors, which assembles vehicles in Spring Hill, Tenn., had a 4 percent gain in U.S. in 2012.
GM executives said the company has the oldest model lineup in the industry, yet it still posted a sales increase and commanded high prices for its cars and trucks. The company plans to refurbish 70 percent of its North American models in the next 18 months and expects to boost sales this year, according to The Associated Press.
North American President Mark Reuss said the company won't give away cars and trucks with discounts like it has in the past, especially when it's in the midst of its biggest product update ever.
Chrysler, the smallest of the Detroit carmakers, had the best year among U.S. companies. Its sales jumped 21 percent for the year and 10 percent in December. Demand was led by the Jeep Grand Cherokee SUV, Ram pickup and Chrysler 300 luxury car.
Toyota, which has recovered from an earthquake and tsunami in Japan that crimped its factories two years ago, said Thursday that sales jumped 27 percent for 2012. December sales were up 9 percent. Unlike 2011, the company had plenty of new cars on dealer lots for most of last year.
The Associated Press contributed to this story.