UPDATE 3-Spain drags, Brazil sparkles in Santander H1 results

* H1 net profit falls 1.6 pct to 4.445 bln euros, in line

* Net interest income up 15 pct to 14.5 bln euros

* Shares down 0.77 percent

* Issues 4-year senior euro bond

(Adds bond, updates shares)

By Sonya Dowsett

MADRID, July 29 (Reuters) - The euro zone's largest bank, Santander (SAN.MC), reported record profits at its Brazilian business on Thursday, against declines in home market Spain which is tentatively emerging from a grim recession.

Shares slipped after the usually outperforming bank failed to surprise on the upside and Spanish banking shares lost some of their gains following relief after Friday's stress tests.

Santander, which emerged as one of Europe's best capitalised banks after the tests, was 0.77 percent lower at 0851 GMT, outpacing a 0.3 percent fall for Spanish banks .IBAN.BC.

The bank has outperformed European peers .SX7P by around 14 percent since shares hit a 12-month low in early June when fears about the Spanish economy peaked. Santander and peer BBVA (BBVA.MC) are often used as trading proxies for Spain by hedge funds.

First half net profit fell 1.6 percent to 4.445 billion euros ($5.8 billion), against a Reuters polled forecast of 4.48 billion. Net interest income, what a bank earns on loans minus what it pays on deposits, was also broadly in line with the poll.

"Although the net result is flat compared to the prior quarter, in the current environment we find these results very respectable and they testify to Santander's remarkable resilience," said Eleonore Lamberty, credit analyst at ING Bank.

Santander launched a 4-year senior euro bond on Thursday, the latest top tier bank to take advantage of buoyant credit markets after the bank stress tests following BBVA (BBVA.MC) and Credit Suisse (CSGN.VX) bond issues on Wednesday. [ID:nWLA9646]

BRAZIL STRONG, HELPED BY CURRENCY

Santander's Brazilian bank (SANB11.SA), which has a market value greater than Germany's Deutsche Bank (DBKGn.DE), saw profit grow 35 percent during the period to 1.294 billion euros and lending grow 28 percent.

"The Latin American performance is strong, partially helped by positive currency effects," said Patrick Lee, banking analyst at Societie Generale.

Latin America accounts for around 40 percent of the bank's group profits. It raised 7 billion euros last year with the flotation of its Brazilian business -- the world's largest initial public offering in 2009.

Net profit at the Santander branch network in Spain fell 14 percent with margins hurt by trending lower interest rates on loans and higher rates paid to savers.

The bank is leading a deposit price war in Spain, paying rates of up to 4 percent in a bid to tempt new customers. Customer deposits in Spain grew by 43 percent during the period.

Santander has fared well compared to other Spanish banks during a severe economic downturn in the euro zone's fourth largest economy which has led to a government-driven consolidation of the sector.

Bad loans as a percentage of total loans at a group level rose slightly to 3.37 percent, the lowest increase since the summer of 2007. Non-performing loans in Spain came in at 3.71 percent, well below the sector average of 5.47 percent. (Reporting by Sonya Dowsett; Editing by Mike Nesbit) ($1=.7684 euros)