* Shares down over 10 pct, drags down other airlines
* Q4 forecast suggests annual loss of 1.3 bln euros
(Updates shares, adds quote, background)
By Tim Hepher and Christoph Steitz
PARIS, Feb 10 Air France-KLM (AIRF.PA) shares plummeted over 10 percent on Thursday to their lowest in nearly three months after the Franco-Dutch flag carrier's warning of heavy losses this quarter, blunting hopes of a sector recovery.
In a statement issued after the Paris market closed on Wednesday, the airline said it expected another 500 million euros ($689.6 million) or so of operating losses between January and March, on top of worse than expected 245 million loss in the third quarter. [ID:nLDE6192G9]
"The whole sector is down on the bad news from Air France-KLM. The 'read-across' for peers is clearly negative," a Frankfurt trader said as airline stocks fell across the board.
By 1534 GMT Air France-KLM was down 10.5 percent at 10.31 euros, after falling as low as 10.31 euros -- the lowest since late November. The drop was the biggest one-day fall in the carrier's stock since March last year.
Investors rushed for the exits without waiting for a management conference call to explain the previous day's figures. Volume reached about four times the usual daily average.
"The recovery in unit revenues has come later than we had foreseen and should, we hope, be evident around the end of this quarter or early next quarter," Chief Executive Pierre-Henri Gourgeon told analysts, but shares stayed near their day lows.
He noted that January to March, which is the final quarter in the airline's financial year, was traditionally the weakest and would be further affected by fuel hedging effects.
The sell-off weighed on other European airline stocks such as British Airways BAY.L, down 2.9 percent, and Lufthansa (LHAG.DE), down 3.9 percent in a rising market. The DJ Stoxxx Travel and Leisure index .SXTP fell 0.8 percent.
The forecast of a fourth-quarter loss placed Europe's second-largest flag carrier on course for a full-year operating loss of around 1.3 billion euros, or some 30 percent worse than many market estimates.
Analysts say Air France-KLM, once the world's largest airline and formed from a merger in 2004, is less well positioned than some others to take advantage of any recovery as it grapples with poor yields and high costs on European routes.
British Airways, which had been mauled by its transatlantic exposure during the financial crisis but which may now see those routes recover in any upturn, last week posted a surprise third-quarter operating profit. [ID:nLDE61409M]
Air France-KLM's figures followed a mixed fortnight for airline earnings as the industry feels its way out of recession.
Low-cost rivals easyJet (EZJ.L) and Ryanair (RYA.I) recently raised their profit forecasts and said they were still taking market share from both BA and Air France-KLM. [ID:nLDE60J1F6] [ID:nLDE61003J]
Air France-KLM said it was still aiming for operating breakeven excluding the impact of pre-2009 fuel hedges during the 2010/11 financial year, which runs from April to March.
Gourgeon said it would hold capacity flat in summer 2010.
The airline has been dogged by outdated fuel hedges taken out when oil prices had reached astronomical levels, but said the impact of this had faded in the third quarter. (Editing by David Holmes) ($1=.7251 Euro)