* Q2 operating profit 703 bln won vs 678 bln consensus
* Weak economy, oversupply put steel market in prolonged slump
* POSCO shares end up 0.2 pct prior to earnings announcement
SEOUL, July 25 (Reuters) - POSCO on Thursday forecast flat second-half profits and warned steel prices would fall further this year due to the economic slowdown in top consumer China, signalling the slump in the steel market was likely to linger longer.
China's cooling economy and Europe's debt crisis have cut the demand for steel, depressing prices of the metal and hitting hard Asian manufacturers such as POSCO, the world's fifth largest steelmaker.
Economists polled by Reuters last week slashed growth forecasts for the world's second-biggest economy yet again, further dimming prospects for steel demand.
"It's too early to say steel prices will show a meaningful recovery because of sluggish demand and chronic oversupply," Kim Jae-yeol, POSCO's senior vice president, told an analysts' briefing after the company announced a slightly better-than-expected 36 percent drop in second-quarter operating profits.
Kim said he expected steel prices to pick up slightly from the fourth quarter after bottoming out in the current quarter.
Second-half profits, however, were likely to remain at the same level as the 1.28 trillion won reported in the first half of this year, Chief Financial Officer Park Ki-hong added.
In South Korea, where POSCO sells around 60 percent of its steel output, the company is hoping a healthy order book from local shipbuilders will help offset weaker demand from its major customers, domestic automobile manufacturers like Hyundai Motor which are reducing their output and expanding overseas production.
2014 INVESTMENTS SLASHED
Benchmark steel prices in China have fallen 7 percent so far this year, and analysts warned that an increase in prices this month was unlikely to last for long in a sluggish economy.
Citing the downturn in the steel market, POSCO said it expects to slash its group investments by 1-2 trillion won ($899 million-$1.8 billion) next year from a projected 7-8 trillion won this year, with most of the cuts at its steel business.
The company maintained its 2013 sales target of 32 trillion won, which is a 10 percent decline from the previous year's actual sales.
Last week, POSCO said it would bow out of a $5.3 billion steel mill development in India's Karnataka state, although it kept another project in Odisha intact.
But some investors questioned the validity of POSCO's overseas expansion plans, as it is grappling with a large debt burden and a prolonged market downturn.
POSCO's CFO Park said the company was in no hurry to build the $12 billion Odisha project given the weakness in the steel market and the global economy. He expected it would take about a year for POSCO to win mining rights for the project.
Shares in POSCO, in which billionaire Warren Buffett's Berkshire Hathaway owns a 5 percent stake, ended up 0.2 percent prior to the earnings announcement.