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UPDATE 4-Peugeot Citroen H1 profit slides, targets cut

(Recasts with news conference comments, DaimlerChrysler result)

By Rebecca Harrison

PARIS, July 24 (Reuters) - French carmaker PSA Peugeot Citroen posted a sharp slide in first-half profits on Thursday and cut key full-year forecasts due to a strong euro and shrinking demand in western Europe.

Europe's second-biggest carmaker said net profit fell 12 percent to 869 million euros ($991 million) in the first half, just lagging the average forecast of 895 million from 14 analysts polled by Reuters.

Peugeot said it now aimed to "maintain or improve" its first-half operating margin in its core autos unit of 3.7 percent for the full year, compared with an initial target of 5.0-5.2 percent, barring a further rise in the euro.

And while sales would edge up slightly in 2003 thanks to stronger demand outside Europe, PSA would fall short of its target for a group operating profit of at least three billion euros, Chief Financial Officer Yann Delabriere told reporters.

Shares in Peugeot had fell as much as six percent, but trimmed losses after DaimlerChrysler reported a smaller-than-expected 62 percent fall in second quarter operating profits. By 1125 GMT, Peugeot shares were off 4.4 percent at 38.55 euros.

Chairman Jean-Martin Folz also trimmed his forecast for the western European car market this year, saying it would drop by three to four percent, compared with a zero to two percent decline predicted in February.

"The lowering of forecasts for Peugeot is being seen as a warning signal for the whole European auto sector," said Henrik Lier, an auto analyst at WestLB Panmure.

"NOT THAT BAD"

Folz, who had not missed a profit target since he took the helm in 1998 and carved out a reputation for PSA as Europe's most reliable mass carmaker, maintained a target of selling 3.35 million vehicles this year globally and insisted the firm was still doing better than many of its peers.

"We clearly missed our targets in the first half," he told a news conference. "But faced with a slowing market and rising euro, we have boosted market share and sales and seen our operating margin fall by only one point -- it is not that bad."

PSA's operating margin -- a key measure of profitability -- in its carmaking unit fell to 3.7 percent from 5.2 percent, while the group margin, which it also hopes to maintain or boost for the whole year, fell to 4.6 percent from 5.6 percent.

PSA last year bucked tough conditions thanks to flash new models and belt-tightenting, but some analysts said Thursday's profit warning confirmed the good times maybe over.

J.P. Morgan cut its rating to "underweight" from "neutral," saying the results demonstrated PSA could no longer offset tough external conditions with cost savings and hot models.

Peugeot is not the only European carmaker to suffer as shaky economies in western Europe stop motorists splashing out on new cars and as euro strength erodes margins, and few of its peers expect profit growth this year.

The world's second biggest carmaker Ford Motor Corp rattled the market last week with a hefty second-quarter loss in Europe, and PSA's domestic rival Renault is expected to post a fall in core earnings when it reports results later on Thursday.

OUTPUT CUT

Folz said the firm would cut output in the second half in line with weaker demand in western Europe by 57,000 in the third quarter and 16,000 in the fourth quarter, by scrapping weekend shifts and third shifts at some plants.

PSA said the rise in the euro, mostly versus the British pound, took a 292 million euro, bite out of operating profit at the autos division while a decline in western European and particularly French sales knocked off a further 58 million.

Some analysts said the lowered profit margin target should not come as a major surprise after the firm in May said its margin targets would be "difficult" to meet.

"I think they had downplayed expectations a bit at the end of May and I don't see the shortfall much worse than that so visibility isn't too much of a problem," said Morgan Stanley analyst Nicholas Hirth, who rates the stock "overweight".

PSA, which earlier this month posted a 1.9 percent rise in unit sales, said turnover rose to 27.763 billion euros from 27.371 billion last year. (Additional reporting by Madeline Chambers and Ralf Benders in Frankfurt)