UPDATE 5-Peugeot unveils 3.3 bln euro margin boost plan

* To boost productivity, cut costs, target growth markets

* "Priority to get our house in order"

* H2 operating profit seen at break-even

* Full-year free cash flow seen positive

* Previously saw full-year operating loss 1-2 bln euros

* Shares pare early gains, up 0.4 pct (Adds details on new models, market share, updates shares)

By Helen Massy-Beresford

VELIZY, France, Nov 12 (Reuters) - Europe's second-biggest carmaker PSA Peugeot Citroen (PEUP.PA) on Thursday raised its full-year outlook and unveiled a plan to lift earnings via productivity improvemenmts, costs cuts and more sales in emerging markets.

The company said it wanted the 3.3 billion-euro ($4.95 billion) initiative to substantially narrow the profitability gap with better-performing rivals like Volkswagen (VOWG.DE), Honda (7267.T), Hyundai (005380.KS), Daimler (DAIGn.DE) and Fiat (FIA.MI) by 2012.

"The priority is to get our house in order," Chief Executive Philippe Varin told investors.

PSA shares powered ahead early in the session to a 13-month high but fell back to trade at 23.87 euros, up just 0.4 percent by 1704 GMT.

The European car market foundered late last year as the credit crisis hit consumer confidence and undercut demand. Manufacturers including PSA slashed production in an attempt to limit the build-up of costly stocks of unsold vehicles.

"We are confident a substantial part of our profitability gap should be closed in the next three years," said Varin, who was appointed CEO in June.

The company said half of the profit boost would come from manufacturing productivity improvements and cost cuts, 30 percent would come from boosting market share in Europe, while the remaining 15 percent would come from stepping up sales in Russia, China and Latin America.

A large part of its planned market share improvement would come from increasing sales to businesses, Varin said.

Varin said the group hoped to achieve its target in a "progressive, linear" fashion and did not rule out making acquisitions.