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* Q1 EBIT plunges to 917 mln euros from 2.1 bln euros
* Many markets developed "worse than expected" - CEO
* H2 results to rebound on new models, cost cuts
* Daimler shares fall in rising market
By Andreas Cremer
BERLIN, April 24 (Reuters) - German automaker Daimler scrapped its earnings forecast on Wednesday after first-quarter profit plunged more than half due to a prolonged slump in European markets and self-inflicted problems in China.
Struggling to match rivals' scale and efficiency in smaller cars, as well as their success in China, Stuttgart-based Daimler has fallen further behind German peers BMW and Volkswagen.
Premium-market leader BMW and VW, whose Audi division pushed Daimler's Mercedes brand into third place in the global luxury race in 2011, both expect group earnings to be flat this year.
Daimler said on Wednesday it expected 2013 earnings before interest and tax (EBIT) from continued operations to be below last year's 8.125 billion euros, a level it had previously aimed to reach again this year.
But after it warned on April 10 that this goal might not be tenable, many analysts had already cut their estimates, lowering consensus for the year to about 7.3 billion euros, according to a Reuters poll.
First-quarter EBIT from ongoing business plunged to 917 million euros ($1.19 billion) from 2.1 billion euros the year before, even missing the low of 930 million euros in the range of analysts' estimates.
"Many markets developed worse than expected for economic reasons, especially in western Europe," Chief executive Dieter Zetsche said in a statement.
The return on sales at Mercedes-Benz Cars deteriorated further to 3.3 percent from 8.2 percent a year earlier, which finance chief Bodo Uebber blamed on a slump in high-margin European markets such as France.
Daimler said it now expected to take longer to reach its margin target due to the tough market environment, even though it aimed to achieve a significant portion of its 2 billion euros in cost cuts by the end of next year.
Still, second-half group results should improve on the first six months, the CEO said, citing growing momentum from cost reductions and model overhauls such as the new flagship S-Class saloon as well as the new CLA four-door coupe.
Shares in Daimler were down 0.7 percent at 40.60 euros by 0804 GMT, while its peers in the European car sector were up 0.1 percent.
CFO Uebber warned there could still be setbacks to business in Europe this year. "The crisis is not yet over, and that is having a negative effect on investments and purchasing behaviour," he told journalists during a conference call.
Analysts have repeatedly questioned whether Mercedes can achieve its long-term goal of overtaking its two German rivals to become the world's largest luxury manufacturer by 2020 so long as its sales growth in China continues to lag theirs.
Audi boosted Chinese sales 30 percent last year to 405,838 cars, while BMW brand deliveries surged 40 percent to 326,444. Conversely, Mercedes sales in China, where it is striving to fix problems caused by internal competition between its two distributors, edged up just 4 percent to 206,150 cars.
"China revenues (at Mercedes-Benz) are unlikely to improve materially until at least the second half, if not the fourth quarter," London-based Stuart Pearson at Morgan Stanley wrote in a research note published after the results.