* Q3 net profit 78 mln euros vs forecast 131 mln euros
* Expects Q4 operating profit to be lower than Q3
* Expects loan loss provisions to rise in Q4
* Dividend payment for 2012 and 2013 "unlikely"
* Shares slightly lower in firmer European market
By Arno Schuetze and Edward Taylor
FRANKFURT, Nov 8 (Reuters) - Commerzbank, Germany's No.2 bank, missed third-quarter profit forecasts and said it was unlikely to pay a dividend this year or next as a weakening European economy hampers its recovery from the financial crisis.
The bank, which received an 18-billion-euro ($23 billion) government bailout at the height of the crisis, said it no longer expected a marked upswing in its lending and investment businesses in 2012 and provisions on bad loans were likely to rise.
"The market environment will remain volatile in the coming months", Commerzbank chief executive Martin Blessing said on Thursday, adding operating profit in the fourth quarter was likely to trail that of the third.
He conceded that Commerzbank will by far be missing its original 2012 target of 4 billion euros in operating earnings. After nine months, the figure stood at 1.3 billion.
For the years to come, the bank is aiming low, setting a profitability goal that is below the industry's average cost of capital of 10-12 percent.
Commerzbank said it targets a return on equity (RoE) of 10 percent for its core operations by 2016, roughly 8 percent at group level.
Peer Deutsche Bank is aiming for at least 12 percent by 2015, while Barclays is looking for more than 11.5 percent and HSBC for 12-15 percent.
Cutthroat competition and shrinking margins are forcing Commerzbank to review its business again, despite spending the last four years restructuring.
German rival Postbank also intensified efforts to eke out profits by appointing a new chief operating officer on Thursday, while Munich-based HVB is restructuring its German business.
Banks across Europe are slashing costs and selling assets to cope with tougher regulations aimed at preventing a repeat of the 2008 crisis. Their efforts are being hampered by a weakening economy as governments drive through austerity measures to sort out their own finances.
At 1200 GMT, Commerzbank shares were down 3.7 percent, underperforming European bank stocks which were up 0.3 percent.
Commerzbank posted a third-quarter net profit of 78 million euros ($99 million), missing analyst expectations of 131 million euros but well ahead of the 687-million-euro net loss reported the same time last year.
Its operating return on equity was 12.9 percent at the core business which the bank plans to keep going forward.
Commerzbank is spending more than 2 billion euros on its core business, with about half the investment earmarked for its retail arm, aiming to win one million new customers by 2016.
Part of the overhaul includes job cuts in an effort to slash costs by 1 billion euros over the next four years. Blessing declined to give a specific number for layoffs.
"We will sit down with the works council and discuss the issue. We will get this done in 2013," he said.
Third-quarter operating profit in its Mittelstandsbank unit - the bank's cash cow specialising in lending to small and medium-sized companies - stagnated at 395 million euros and revenues decreased, highlighting the impact of a weak economy.
Recent data showed output and industrial orders have fallen while joblessness has risen in Germany.
The bank said it planned to pay back long-term refinancing loans to the European Central Bank in the first quarter of 2013, two years ahead of schedule to save on interest payments.
"We are flushed with liquidity. You can even free up the collateral and use it today to fund yourself cheaper than with the Bundesbank," which made the loans on behalf of the ECB, Blessing said.