* Q1 adjusted EBIT 2.1 bln euros vs forecast 1.9 bln
* Mercedes sales up 14 pct, margins more than double
* Reiterates sees significantly higher EBIT this year
* Shares drop 2 percent after strong run (Adds CFO comments on dividend and currency exposure)
By Edward Taylor
FRANKFURT, April 30 (Reuters) - Daimler's first-quarter operating profit more than doubled as surging sales of new cars and improving margins in its Mercedes-Benz luxury autos division extended its recent recovery.
Having dropped to third place in luxury car sales rankings in 2011 behind BMW and Volkswagen's Audi, Mercedes-Benz closed the gap in 2013 thanks to redesigned vehicles and new compact cars such as the A-Class sedan.
The group said on Wednesday sales of Mercedes-Benz cars rose 14 percent in the first quarter, driven by demand from China and the United States, as it prepares to roll out a fresh version of its new C-Class model, currently the best selling Mercedes-Benz.
"Daimler's rebirth and rehabilitation continues with these first-quarter results. This is supposed to be Merc's weakest quarter of 2014 with the changeover of the C-Class, so it bodes well for the rest of the year," said Bernstein analyst Max Warburton in a note to clients.
Daimler shares, which have outperformed Germany's blue-chip DAX index this year, were down 1.7 percent at 1315 GMT due to what traders said was an opportunity to take profits.
Daimler said group earnings before interest and tax (EBIT) from ongoing business rose to 2.07 billion euros ($2.9 billion) in the three months ended March, up from 949 million euros in the year-earlier period, and above the 1.906 billion forecast in a Reuters poll.
Including buses and trucks, total sales rose 13 percent.
Profitability at Mercedes-Benz has improved as a range of new vehicles including the A- and B-Class compact cars as well as its flagship S-Class hit showrooms, more than doubling the division's return on sales from ongoing operations to 7 percent in the quarter, up from 3.3 percent in the year-earlier quarter.
Daimler said it aimed to increase that to 10 percent in the medium term.
The company reiterated it saw significantly higher EBIT from ongoing business this year, despite currency headwinds of about 1 billion euros, which were mainly related a weaker dollar, yen and also rouble against the euro.
Daimler has hedged around two thirds of its currency exposure, Chief Financial Officer Bodo Uebber said on a conference call.
Daimler is still targeting a dividend payout ratio of around 40 percent of EBIT, and will use 2.4 billion euros in proceeds from a sale of its stake in a power systems company to Rolls-Royce Holdings PLC to invest in its core business rather than in a special dividend, Uebber said.
The Stuttgart-based automaker's first-quarter results stand in sharp contrast to last year, when Daimler warned it might have to cut its profit expectations only nine weeks after it had reported full-year results, blaming a slump in car sales.
In February this year, Daimler said it expected group EBIT to increase "significantly" in 2014 from the 7.9 billion euros it reported for last year.
Furthermore it said it saw significantly higher sales at Mercedes-Benz than the 1.566 million cars it sold in 2013.
Daimler said it would take no action in response to the West's standoff with Russia over its actions in Ukraine, and that investments would continue.
"This is a matter for politics to resolve. It would be a mistake to put everything on hold," Uebber said.
Daimler sold 11,000 passenger cars and 500 trucks in Russia in the first quarter.
($1 = 0.7237 Euros) (Editing by Victoria Bryan and Mark Potter)