* BAT half year earnings rise 7 pct, in line with forecasts
* Sees good earnings growth for full year 2012
* Weak southern Europe is offset by developing markets
* Volumes flat, but price hikes push up underlying sales
* Shares dip 1.3 percent in a slightly lower UK stock market
By David Jones
LONDON, July 25 (Reuters) - British American Tobacco expects good earnings growth this year despite the strong pound holding back its performance at the half-year after the world's No.2 cigarette maker gained from price rises and strong developing markets.
The London-based group, which makes Kent, Dunhill, Lucky Strike and Pall Mall cigarettes, said on Wednesday earnings rose 7 percent in the first half and analysts sees a similar rise for the full year with sterling's strength still dampening growth.
Chairman Richard Burrows said despite global economic uncertainty, especially in southern Europe, and the adverse translation impact of the strong pound on profits the group had performed well and he was upbeat for the full year.
"The underlying business continues to perform well and we are confident of another year of good earnings growth," he said.
BAT suffered in the southern European markets of Spain, Italy and Greece where cigarette market volumes were down around 10 percent, but gained in still fast-growing developing markets such as Russia, Vietnam, Pakistan and Nigeria.
BAT, which made 705 billion cigarette last year, is the most globally spread of the big tobacco groups with over 60 percent of profits coming from developing markets, which have helped to offset tough conditions elsewhere with smoking levels declining in Western Europe and North America.
Overall half-year volumes were flat at 344 billion cigarettes while price rises pushed up its underlying sales by 4 percent, and the group sees more price hikes in the second half.
The strength of the pound trimmed three percentage points off the earnings advance with the UK currency gaining from its status as a safer haven in the euro zone crisis. BAT said the pound was strong against some of its key trading currencies like the Brazilian real, South African rand, Russian rouble and euro.
Analyst Dirk Van Vlaanderen at brokers Jefferies described the first-half results as solid despite the exchange rate headwinds, and did not expect the consensus 2012 earnings estimate to change materially from the anticipated 7 percent growth to 207.9 pence a share for the full year.
BAT shares dipped 1.3 percent to 3,264 pence by 0800 GMT following a strong run since May as its defensive qualities were highlighted by analysts in the global market uncertainty.
The company posted its 7 percent rise in half-year adjusted diluted earnings per share to 102.4 pence, in line with a consensus forecast of 102.5 pence according to a company-compiled survey of analysts.
The half-year dividend, set at one third of 2011's full year level, rose 11 percent to 42.2 pence a share.
BAT raised its 2012 share buyback by two-thirds to 1.25 billion pounds in February confident of its growth prospects and that it still had adequate firepower for acquisitions.
Rival Imperial Tobacco reported on Tuesday that price rises offset volume falls as it lifted its revenues by three percent in the nine-month to end-June after it suffered in recession-hit Spain as well as Ukraine and Poland.