(Adds executive, analyst, fundmanger quotes, updates shares)
By Madeline Chambers
FRANKFURT, July 24 (Reuters) - DaimlerChrysler core profits sank by nearly two thirds in the second quarter, hit by losses at its U.S. Chrysler arm, but the drop was not as bad as feared and the auto giant clung to its full-year profit guidance.
The world's fifth-biggest carmaker, which issued a shock profit warning last month due to Chrysler's troubles, said on Thursday second-quarter operating profit dropped 62 percent to 641 million euros ($736 million) from a year ago.
That compared with an average forecast of 288 million euros in a Reuters poll of 30 analysts. The results were boosted by a stronger-than expected rebound in profits at the trucks unit and sent the shares up sharply.
The group, whose brands include Mercedes, Jeep, Dodge and Freightliner also said it still aimed to post an operating profit of about five billion euros for the full year.
"The development of leading indicators in recent weeks has pointed towards an improvement in economic prospects," Chief Executive Juergen Schrempp told a conference call.
DaimlerChrysler shares, which have fallen about 30 percent in the last year, jumped on the news and were up 3.5 percent at 31.21 euros by 1452 GMT.
By contrast, shares in France's PSA Peugeot Citroen, fell 3.3 percent after it cut its full-year profit targets and adopted a gloomier view of the European car market. J.P. Morgan cut its rating on the French car maker to "underweight" from "neutral," saying the former sector darling could no longer offset tough external conditions with cost cuts and hot models.
German rival Volkswagen on Friday is expected report that its second quarter results nearly halved.
DaimlerChrysler bonds also rose in reaction to the German-American group's better than expected results.
"It's the trucks unit above all which is responsible for the positive surprise at the operating profit level," said Michael Punzet, an analyst at Landesbank Rheinland-Pfalz.
Some investors noted that expectations had been very low after the profit warning last month.
"The share price reaction shows how cautious people were ahead of the results," said Susan Levermann, a DWS fund manager.
Chrysler, which blamed fierce pricing competition in the U.S. for the collapse in earnings, posted a second-quarter operating loss of 948 million euros and was still a concern.
The group said it would still strive for a small operating profit at Chrysler this year, with further cost cuts, but that risks remained due to the tough market.
Some analysts saw the comments as a hidden profit warning.
"There are major risks in the U.S market and the competitive situation there, and I believe Chrysler in the second half will be hit again," said Michael Raab, auto analyst at Sal Oppenheim. "My conclusion is they will not finish the year in the black."
Margin-devouring consumer incentives, which have become a staple of the U.S. car market, have also hurt profits at Detroit rivals General Motors Corp and Ford Motor Co .
DaimlerChrysler cut its full-year revenues target to 135 billion euros from an earlier goal of 145 billion euros, citing lower unit sales and the stronger euro against the dollar.
However, Chief Financial Officer Manfred Gentz said the group was 90 percent hedged on the U.S. dollar, British pound and Japanese yen this year and expected only a limited impact on 2004 earnings from a stronger euro.
The trucks unit, which aims to lift profits significantly this year through cost savings, performed better than expected with a second quarter operating profit of 211 million euros, compared with a loss of seven million a year ago.
An additional blow came from Japan's Mitsubishi Motors Corp , 37 percent owned by DaimlerChrysler, which earlier slashed its earnings outlook.
"The profit warning at Mitsubishi raises the fear that all the problems within the group seem to be coming back in 2003," said HVB analysts in a research note.
June's profit warning shook investors and sparked questions about the strategic logic of the 1998 merger between Chrysler, then the most profitable U.S. carmaker, and Daimler-Benz.
But Schrempp, who came under pressure two and a half years ago when Chrysler losses dragged the whole group into the red, stuck to his global strategy.
"We have identified mainly a market and revenue problem. We have to solve that problem but it has no effect whatsoever on our strategy," Schrempp said. He added that signs of a recovery in the world economy combined with new product launches could make 2004 a better year for business than 2003.
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