UPDATE 2-Salzgitter sees fragile European steel market

* Q3 pretax loss 66.1 mln eur vs Reuters poll loss 43 mln

* Sees Q4 group pretax results approaching break even

* Sees overproduction as threat to European market rebound

* Shares down 0.9 pct, lagging German blue-chip index

(Adds market reaction, background)

FRANKFURT, Nov 12 (Reuters) - Salzgitter (SZGG.DE), Germany's second-biggest steelmaker, warned on Thursday that overproduction could smother a tentative recovery in the European steel market.

"We anticipate that the European steel market will continue to stabilise moderately, to varying degrees depending on the product group," it said on Thursday as it reported a third-quarter pretax loss that missed market expectations.

"Fundamentally speaking, however, the recovery is fragile and might come to a halt, for instance, if there is a renewed incidence of an oversupply in the market as a result of the reactivation of temporarily unused capacity."

ArcelorMittal (ISPA.AS), the world's largest steelmaker, had dampened recovery expectations on Oct. 28 with a muted forecast for the final three months of 2009 after a return to profit in the third quarter. [ID:nLQ682729]

Salzgitter said its Steel division expected monthly results to improve in the fourth quarter mainly owing to better capacity utilisation of plants and more favourable prices.

The group swung to a third-quarter pretax loss of 66.1 million euros ($99.04 million), lagging the average estimate of a 43 million loss in a Reuters poll of analysts. [ID:nL659525]

It cited the impact of plants idled for maintenance and investments and lower capacity utilisation.

Equinet analysts focused on a drop in the operating margin at its Tubes division, which had until now helped cushion depressed profits. Equinet kept a "reduce" rating on the stock.

MARKET GLUT

Chief Executive Wolfgang Leese had already cautioned against premature optimism in the steel sector, warning that recent signs of recovery were unlikely to be sustained. [ID:nB527739]