UPDATE 1-Chinese demand lifts BMW car profits above forecast
* Q4 Autos EBIT margin 10.6 pct vs Rtrs poll avg 9.2 pct
* BMW bucks margin squeeze suffered by Audi, Mercedes
* Ups dividend to 2.50 eur/shr vs Rtrs poll avg 2.64 eur/shr (Adds details, background)
FRANKFURT, March 14 (Reuters) - BMW, the world's largest premium carmaker, beat fourth-quarter profit forecasts at its core auto business thanks to surging demand in China and an increase in margins that bucked the trend at rivals.
The German firm said on Thursday earnings before interest and tax at its auto business rose by a third to 2.08 billion euros ($2.7 billion) on the back of higher car sales, beating analysts' average forecast of 1.76 billion in a Reuters poll.
The company proposed hiking its dividend by about 8 percent to 2.50 euros, returning roughly a third of its overall profits to shareholders, though slightly less than analysts' estimate.
The operating margin at BMW's car business, the best gauge to benchmark it with peers Mercedes-Benz and Audi , grew to 10.6 percent in the three months ended December.
That was a rare improvement from both the previous quarter and the same period the year before, and beat a Reuters poll estimate of 9.2 percent. It also bucked an industry trend towards worsening pricing power.
While BMW's car business increased profitability by about 1.4 percentage points over the previous year's period, Audi suffered a 1.3-percentage-point decline and Mercedes reported a drop of 3 percentage points.
BMW's shares failed to benefit, however, falling 1.1 percent, in line with losses among auto sector peers.
The firm declined to provide an earnings forecast ahead of next week's annual press conference. Mercedes and Audi have both warned of a deterioration this year amid recession in Europe.
Mercedes expects operating profit to decline slightly while Audi has signalled its return on sales will be at the upper end of an 8-10 percent range, after achieving an 11.0 percent margin last year.
Germany's trio of luxury carmakers are in rude health, however, when compared to mass market peers like Peugeot , currently grappling with a glut in capacity, bloated workforces, eroding prices, heavy losses and tumbling demand.
($1 = 0.7722 euros) (Reporting by Christiaan Hetzner, Editing by Harro ten Wolde and Mark Potter)