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UPDATE 2-Avis Europe shares sink after warning

(Adds interview with chief executive, detail)

By Victoria Cutler

LONDON, June 27 (Reuters) - Shares in Avis Europe Plc sank by as much as 22 percent on Thursday after the car rental firm warned that profits this year would be lower because companies had reined in travel budgets.

Avis Europe said it now expected full-year profits in euros before tax, exceptional items and goodwill amortisation to be up to 15 percent lower than 2001 and did not see a recovery in corporate volumes in the second half.

Its shares, which had risen from a slump after the September 11 attacks on the United States, sank to their lowest levels since November and were down 36-1/4 pence or 21 percent at 136-3/4p by 1000 GMT.

Shares in its 57 percent parent, Belgian car importer and retailer D'Ieteren , fell more than 10 percent and were downgraded by Bank Degroof to "hold" from "accumulate".

Avis said group revenue after September 2001 fell five percent below the previous year in the final quarter and although business from the leisure sector -- about 20 percent of group sales -- continued to improve steadily, the corporate sector, affecting about 40 percent of sales, had weakened.

"I think everyone had been expecting economic recovery to support more corporate activity," Chief Executive Mark McCafferty told Reuters.

"We're not seeing that in our business yet, so we've taken out our expectations for a recovery, particularly in the fourth quarter this year."

"As soon as economic growth genuinely starts to improve then we would expect that the confidence of our corporate customers to start investing in their businesses again would return."

But he said the firm was assuming that a recovery in corporate business would now not happen until 2003 at the earliest.

He said European leisure volumes, which made up about 30 percent of revenues last year, were now above the previous year. The transatlantic leisure business, about seven percent of last year's revenues, was still below last year, but was expected to show comparative growth after September, he added.

The company said it had cut its fleet and adjusted staffing levels by about seven percent each compared to a year earlier, adding that full-year fleet costs would be in line with expectations.

McCafferty said most of the adjustments would come from not taking on as many seasonal staff as usual for the peak third quarter summer season and from not buying as many new cars. The business typically only keeps cars for about six months.

"These two areas are over 70 percent of our costs, so if we adjust those, we've addressed most of the issue," he said.

The company said in late February it expected growth levels to recover in the second half of 2002, but remained cautious about a recovery in corporate travel.