UPDATE 2-Smith & Nephew's margin gains defy weak market

* Adjusted EPS up 10 pct at 15.4 cents vs consensus 14.3

* Revenue down 7 pct at $926 mln vs consensus $943 mln

* Orthopaedics market hit by deferred procedures

* Trading margin improved 310 basis points to 22.9 pct

* Shares up 3.5 pct

(Adds CEO comments, detail on rivals)

By Ben Hirschler

LONDON, July 30 (Reuters) - Smith & Nephew (SN.L) managed to increase profits in the second quarter, despite continued weakness in the orthopaedics market that saw cash-strapped consumers and governments deferring some surgical procedures.

Europe's leading maker of replacement hips and knees posted a 7 percent fall in sales to $926 million on Thursday, below the consensus of analysts' forecasts of $943 million, as a strong dollar also weighed.

But adjusted earnings per share came in 10 percent higher than a year ago at 15.4 cents, beating forecasts of 14.3 cents, as the group's trading margin improved 3.1 percentage points to 22.9 percent, helped by efficiency gains and cost controls.

Chief Executive David Illingworth said it was "a good achievement in weaker markets" and shares in the company rose 3.2 percent by 0732 GMT.

He reiterated his commitment to an Earnings Improvement Programme (EIP) that is designed to lift trading margin to 24.5 percent by 2010, although he acknowledged in a conference call with reporters this target was now somewhat riskier.

Illingworth said guidance for the rest of 2009 was unchanged from the first quarter, except S&N expects to see products for younger more active patients disproportionately hit by market weakness.

The market for hip and knee replacements has been one of the most dynamic sectors in healthcare in recent years, driven by ageing Baby Boomers.

But S&N -- like U.S. rivals like Stryker (SYK.N), Zimmer (ZMH.N) and Johnson & Johnson (JNJ.N) -- is now seeing demand for such costly elective procedures growing at a slower pace as a weak economy puts them out of reach for some patients.

Illingworth said there was some downward pressure on prices but it was "not remarkable", with prices generally to flat to 1 percent lower.

Some analysts have suggested that H1N1 swine flu and increased pressure on hospital beds could also reduce capacity for orthopaedic operations, which account for more than half of S&N's business. But Illingworth said he did not see a major impact from the current flu pandemic.

(Editing by Marie Maitre)