UPDATE 2-SCA strengthens key margin in Q2, shares rise

* Q2 pretax profit 2.2 billion crowns, vs forecast 1.8 bln

* Sales 27.7 billion crowns, vs forecast 27.6 bln

* Sees demand stronger in packaging, stable for tissue

* Buys Mexican diaper business for $50 million

* Shares up 6.7percent

(Adds CEO, analyst comment)

By Nick Vinocur and Jens Hansegard

STOCKHOLM, July 21 (Reuters) - Swedish hygiene and paper product maker SCA (SCAb.ST) forecast stronger demand for its packaging business after healthier margins in the key tissue area helped lift second-quarter profit above estimates.

SCA, whose products range from nappies to corrugated cardboard, said it would further strengthen the tissue margin by pushing through price hikes in the second half, taking advantage of improving economic prospects to offset raw material costs.

Its shares were up 6.7 percent at 0835 GMT after earlier leaping 8 percent to a four-month high at 102.7 crowns.

"It was a strong report," Swedbank analyst Claes Rasmuson said. "It was especially surprising to see the margin rising in tissue ... they improved the overall operating performance and the outlook they provided was fairly solid."

Chief executive Jan Johansson told Reuters that brighter economic prospects in some markets was likely to boost demand for packaging, newsprint and magazine paper -- though it would remain stable for the tissue segment.

"We'll see somewhat higher raw material costs (for tissue) in Q3 as well, but we're raising prices both on consumer and away-from-home products," he said. "Demand on packaging keeps rising, we're seeing a turn in the economy."

SOLID TISSUE MARGIN

SCA, Europe's biggest manufacturer of corrugated packaging and hygiene products, posted pretax profit, excluding items, of 2.2 billion crowns ($299 million) versus a mean forecast of 1.8 billion in a Reuters poll of 12 analysts.

The company suffered a sharp fall in demand during the global economic crisis and was left struggling to protect its margins from high raw material costs, driven by economic growth in China, during the recovery phase.

Now the firm has begun to offset those costs by hiking prices. Johansson said he would lift prices for consumer tissue by an average of 6 percent in the second half and by 4 percent in packaging for the third quarter.

Thanks in part to the price hikes, the operating margin in the tissue segment -- making up 27 percent of group sales -- rose to 7.9 percent from 7.3 percent in the second quarter.

However, Johansson also highlighted the risk of further increases in raw material prices.

"The developments in China ahead and how they will affect the raw materials markets are the big areas of uncertainty ahead," he said.

Input prices had continued to rise during the second quarter, with the cost of pulp increasing by 60 percent in the period compared to a year ago and recycled paper up by more than 70 percent, the firm said.

It also announced the purchase of a diaper-making company in Mexico for around $50 million. (Editing by Hans Peters; Editing by Hans Peters)