UPDATE 1-VW confident on H2 despite market upheaval

* H1 sales up 20.7 pct to 61.8 billion eur

* Operating profit up to 2.8 bln eur from 1.2 bln eur

* Sees significant rise in FY revenue, operating profit

* Shares up over 2 percent

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MUNICH, July 29 (Reuters) - Volkswagen's (VOWG_p.DE) first half earnings beat forecasts, thanks in part to strength in China, and it said it was confident of improving its sales and margins even though the second half would get tougher.

Global carmakers are building up their businesses in lucrative, fast-growing regions such as China to offset the shakier outlook in traditional markets, where government austerity measures might take a toll on nascent signs of recovery.

By 0918 GMT shares were up 2.18 percent, outperforming the European autos stocks index .SXAP, which was up 0.43 percent.

Volkswagen said it had performed "significantly better" than expected in the first half and said high demand for its models in Western Europe, China, North and South America helped.

"The dynamic growth in the Volkswagen Group's sales revenue and earnings in the first half of 2010 will not continue undiminished in the second half of the year," it added.

"Nevertheless, we believe that our sales revenue and the group's operating profit in 2010 will be significantly higher than last year's figures, despite shifts in volumes between the markets."

Group operating profit jumped to 2.8 billion euros in the first half, from 1.2 billion euros a year ago.

Pretax profit rose to 2.6 billion euros from 800 million in the first half of 2009. This figure includes earnings contributions from its stakes in Porsche AG (PSHG_p.DE), MAN SE (MANG.DE) and its two Chinese joint ventures.

VW's luxury brand Audi (NSUG.DE) posted a second-quarter margin of 9.2 percent, up from the 5.8 percent it achieved in the first quarter of 2010, and drawing in on the 9.8 percent achieved by rival Mercedes-Benz (DAIGn.DE).

According to Reuters calculations, the flagship VW brand achieved a 2.97 percent operating margin in the second quarter, up from the 2.2 percent it posted in the first quarter of this year.

French rival Peugeot Citroen (PEUP.PA) said on Wednesday its automotive division would be "close to break-even" in the second half, but warned "more difficult market conditions" were expected in its core European market, where the scrapping incentive schemes that have underpinned the industry are coming to an end.[ID:nLDE66Q1GN]

Fiat (FIA.MI) Chief Executive Sergio Marchionne forecast last week a 10 percent drop in Europe's car market in the second half. (Reporting by Christiaan Hetzner, editing by Will Waterman)