(Adds fund manager comment, detail on third quarter)
By Nick Tattersall
FRANKFURT, Oct 29 (Reuters) - Volkswagen said on Wednesday profits were likely to be halved this year after weak demand, a strong euro and the price of revamping its Brazilian business hammered third-quarter earnings.
In addition Europe's biggest carmaker warned that full-year results would also be hit by higher than anticipated costs in developing a range of new vehicles.
Operating profit fell 57 percent to 510 million euros ($597 million) in the three months to the end of September, falling short of the 560-million euro consensus of market forecasts surveyed in a Reuters poll.
"The negative impact of the strong euro, declining sales figures in important markets and upfront expenditures for new models, as well as the restructuring in Brazil, depressed the operating profit in the first nine months," the company said.
VW's share price, which has outperformed European peers by seven percent this year, was down 3.11 percent at 42.73 euros by 1056 GMT compared to a 0.91 percent fall in the DJ Stoxx European sector index .
"It is clearly not what people were hoping for. The results, especially operating profit, was not exactly encouraging and that is what has hit its shares," Gerald Roessel at Invesco Asset Management said.
Suffering along with rivals as car demand stagnates in a weak economic environment, VW has also been hit this year by the high cost of several new model launches, including its key Golf V hatchback, Audi A3 and Transporter van.
It said a tighter control on investment spending and increasing sales of the new models would help its operating business to stabilise in the remaining months of the year, although a revaluation of upfront costs would hit the result.
"Taking these measures into account, the operating profit for 2003 will probably be just under half the level of the previous year," the company said.
A spokesman declined to comment further on the revaluations ahead of a conference call at 1300 GMT.
French rival PSA Peugeot Citroen last week warned on profits for the second time in three months and said sales had fallen in the third quarter as it too battles a generally rocky market and the impact of a strong euro.
VW said it had lifted its hedging to protect against the strength of the euro, with some two-thirds of its U.S. dollar exposure hedged for 2004.
The group confirmed it had taken provisions of 120 million euros for overhauling its business in Brazil, where it is slashing nearly 4,000 jobs amid chronic overcapacity in the worst car market the country has seen for a decade.
The German giant recently lost its title as the number one car seller in Brazil to General Motors Corp. , but is hoping to recover the top spot with its new "Fox" compact car, launched earlier this month.
(Additional reporting by Jess Smee and Madeline Chambers)