* To hire hundreds of staff, chase German deposits
* Q2 net income down 4.7 pct, a smaller-than-expected drop
* Italy loan losses, investment banking weakness weigh
* BNP seeing signs of improvement in Europe
* Not seeking acquisitions, "no need" to raise capital (Adds analyst comments, details on German market, share price)
By Lionel Laurent and Matthias Blamont
PARIS, July 31 (Reuters) - French bank BNP Paribas plans to expand in Germany, Europe's biggest economy, after cost cuts failed to stem sliding quarterly earnings in flagging markets like Italy.
The euro zone's biggest bank by market value will hire up to 500 staff and increase its annual revenue from German operations to 1.5 billion euros ($1.99 billion) from 1.1 billion.
Germany is the euro zone's biggest market and one of its most resilient economies, even though recent data has been mixed, with the private sector expanding and unemployment falling, but industrial data and exports weakening.
BNP will use its new online bank, "Hello Bank", to gather deposits from retail customers. Germany's retail banking market is dominated by Deutsche Postbank and Commerzbank, while a few foreign banks, including ING, have a limited presence.
It will also ramp up its existing corporate and investment banking services, such as cash management and bond issues.
The timing may prove right as top lender Deutsche Bank cuts back on risk and as other local banks restructure.
"BNP is really under-represented in Germany. There is potential for them in segments like small-to-medium-sized export businesses, particularly towards Asia, or in providing financial services to local savings banks," said Jean-Pierre Lambert, analyst at Keefe, Bruyette & Woods.
BNP derives more than half its annual revenue from its French, Italian and Belgian markets. But the euro zone's economic problems are pushing the bank to chase growth in Asia and the United States, as well as Germany, while stepping up cost savings.
Although cost cuts helped bring expenses down in the second quarter, they were not enough to avert a 4.7 percent drop in quarterly net profit to 1.76 billion euros ($2.33 billion) due to rising provisions for bad loans in Italy and weakness at its investment bank. BNP's revenue fell 1.8 percent to 9.92 billion euros.
Analysts had expected 1.51 billion euros in net profit and 9.84 billion in revenue.
BNP shares were up 1 percent at 48.32 euros by 0940 GMT.
BNP Chief Operating Officer Philippe Bordenave told Reuters Insider there were signs of improvement in Europe but that they would only fully become visible in the second half of 2013.
Commenting on the outlook for loan-loss provisions, he added: "We are relatively confident as far as France and Belgium are concerned ... in Italy, it may be somewhat more difficult."
Italy has been in recession since mid-2011 and its government does not see a return to growth before the fourth quarter of this year.
BNP is not seeking acquisitions and does not need to raise capital as its balance sheet is "rock solid", Bordenave said.
BNP's performance follows a mixed bag of European bank results, with Britain's Barclays announcing a $9 billion cash call to meet tougher rules on risk and Deutsche Bank promising a slew of asset sales.
BNP is one of the best capitalized banks in Europe, with a core capital ratio of 10.4 percent and a core leverage ratio of 3.4 percent under tougher Basel III rules, above the minimum required and slightly above the average.
But its corporate and investment bank has been singled out as an area of underperformance by analysts. In the second quarter, that division's pretax profit fell almost 40 percent, hit by falling bond trading revenue and poor demand for corporate banking in Europe.
By contrast, UBS' investment bank swung to a pretax profit from a pretax loss in the quarter, with operating profit at the division up almost a third. Deutsche Bank saw a 58 percent rise in pretax profit at its trading and corporate banking unit.
BNP shares are up about 12 percent this year, giving the bank a market capitalization of 59.4 billion euros. It has underperformed rivals that have undergone more radical restructuring such as France's Natixis and Credit Agricole, and Switzerland's UBS. ($1 = 0.7547 euros) (Editing by Mark Potter and Louise Heavens)