* Q4 earnings fall 76 pct to 127 mln euros
* To speed up costs cuts, raise payout ratio by 2016
* New ROE target of at least 10 pct by 2016
* European economy set for "pick-up" - CFO
* Shares down 4.1 percent (Adds details of probe in paragraphs 7 and 8)
By Lionel Laurent and Matthias Blamont
PARIS, Feb 13 (Reuters) - BNP Paribas, France's biggest listed bank, has set aside $1.1 billion for a possible fine for breaching U.S. sanctions on countries including Iran, the latest bank to take a hit to profit from a legal investigation.
As well as facing tougher regulations in the wake of the financial crisis, banks across the world are under investigation for a string of alleged misdeeds, including fixing benchmark interest rates and manipulating foreign exchange markets.
This month, Credit Suisse set aside 514 million Swiss francs ($570 million) to cover U.S. investigations, while in January Deutsche Bank blamed legal costs for a surprise quarterly loss.
BNP said on Thursday it had set aside the funds after talks with the U.S. authorities, though it said there had been no discussion on the size of any potential penalty.
"We've been doing a retrospective review for several years and we've basically now presented our findings to the U.S. authorities," BNP Chief Financial Officer Lars Machenil told Reuters Insider TV.
Standard Chartered agreed in 2012 to pay $327 million to resolve allegations that it violated U.S. sanctions against Iran, Sudan, Burma and Libya.
The sanctioned countries at issue in the BNP investigation also include Iran, Sudan and Cuba, according to a person familiar with the matter.
Representatives of the U.S. Treasury Department's Office of Foreign Assets Control, the Manhattan District Attorney, the U.S. Attorney for the Southern District of New York, the Justice Department, the Federal Reserve and the New York Department of Financial Services, which the person said are all involved in the probe, either declined comment or did not immediately respond to a request for comment.
BNP's provision - which was accompanied by restructuring costs and writedowns on the acquisition value of BNP's Italian unit BNL - dragged fourth-quarter net income down to 127 million euros ($173 million) from 519 million a year earlier, offsetting a rise in group revenue and gross operating profit,
Analysts had been expecting a net profit closer to 1.0 billion euros, according to a Thomson Reuters poll of analysts.
BNP shares were down 4.1 percent to 58.38 euros at 1300 GMT, the biggest fall on the STOXX 600 Europe banks index.
BNP struck a confident tone for the future despite the one-off costs, promising a double-digit percentage rise in earnings over the next three years and an increase in the dividend payout to 45 percent of earnings by 2016 from 41 percent in 2013.
But several analysts and traders said they were disappointed by BNP's unchanged 2013 dividend of 1.50 euros a share and the bank's relatively "underwhelming" targets, which also included a 10 percent return on equity (ROE) by 2016.
By comparison, French rival Societe Generale expects to reach an ROE of 10 percent by 2015, a year earlier than BNP, while UBS and Deutsche Bank are respectively targeting 15 percent in 2016 and 12 percent in 2015.
"We find these (targets) fairly underwhelming," Jefferies analyst Omar Fall wrote in a note to clients.
"This is all unhelpful for a stock priced for meaningful capital return," he added, arguing investors had already factored an improving dividend into BNP's share price.
BNP Chief Executive Jean-Laurent Bonnafe shrugged off the comparisons, telling journalists that a 10 percent ROE in the current environment was the same as a pre-crisis 20 percent. The bank's ROE in 2013 was 7.7 percent excluding one-off items.
"We are not an aggressive bank, we are a calm bank," he said. "Investors might want more and analysts might want to write other things ... (but) we need to balance all of the bank's interests."
BNP said its balance sheet was "rock solid", reporting a core Tier 1 capital ratio under tougher Basel III rules of 10.3 percent - topping its long-term target of 10 percent.
Like SocGen and other European banks, BNP is targeting new growth avenues after years of shoring up its balance sheet due to tougher rules on risk taking after the financial crisis.
Although BNP was seen as one of the winners of the crisis after buying collapsed Benelux bank Fortis, it is heavily exposed to relatively slow-growing mature European markets.
BNP's Machenil forecast the bank would benefit from a "moderate" pick-up in the European economy in 2014. The bank also said it would speed up cost cuts and continue expanding its footprint into faster-growing U.S. and Asian markets.
It is shopping for medium-sized bolt-on acquisitions: in December it agreed to buy Polish bank BGZ for $1.4 billion.
BNP's core retail markets of France, Italy, Belgium and Luxembourg delivered a mixed performance in the fourth quarter, in what the bank said was a "lacklustre environment" in 2013. Pretax profit fell in slow-growing France and struggling Italy.
BNP's corporate and investment banking unit, weighted more towards bonds than equities, reported a 36.2 percent rise in pretax profit to 350 million euros. A jump in equities revenue offset fixed-income weakness, BNP said, mirroring broader market trends as central banks rein in monetary stimulus.
($1 = 0.9011 Swiss francs) (additional reporting by Karen Freifeld in New York and Aruna Viswanatha in Washington; Editing by Andrew Callus and Mark Potter)