UPDATE 2-UPM to sell paper packaging unit for $170 mln

* To sell unit to Sweden's Billerud for 130 mln euros

* Oct-Dec underlying profit 147 mln euros vs forecast 136 mln

* Says expects to increase profits this year

* UPM shares up 4.5 pct, Billerud down 0.8 pct

By Eero Vassinen

HELSINKI, Feb 1 (Reuters) - Finnish paper maker UPM-Kymmene is selling its paper packaging business to Sweden's Billerud for 130 million euros ($170 million) as part of its drive to cut capacity and improve profitability.

UPM has closed about 14 percent of its paper capacity since 2005, making it one of the leaders of restructuring efforts as the industry battles a decline in demand.

"I think the price is good for those assets and, strategy-wise, I think it is clever," said Evli Bank analyst Markku Jarvinen.

UPM also said on Wednesday it expected to increase earnings this year after reporting a 30 percent decline in underlying adjusted operating profit to 147 million euros ($192 million) for October-December.

That was better than analysts' average forecast of 136 million. Its shares were up 4.5 percent at 10.24 euros in afternoon trading, while Billerud's were down 0.8 percent at 59.25 Swedish crowns.

UPM said it expected adjusted operating profit in the first half of 2012 to be about the same level as in the second half of 2011.

It expects profits this year to benefit from sales and cost savings from Myllykoski, a debt-laden rival it recently acquired and is now restructuring.

The company is also trying to improve its long-term profitability by expanding its energy business, which helps save on production costs.

UPM said it would invest 150 million euros in a new refinery that will produce biofuels from crude tall oil, a by-product of pine-wood pulp manufacturing. The factory in Lappeenranta, southeast Finland, will be operational in 2014, it said.