* Reported net profit 71.6 mln eur vs 498.9 mln loss yr ago
* Underlying profit excluding fair-value gains 5.2 mln
* Aims to sell Austrian, Italian bank units within 18 months
(Adds quotes from news conference)
By Michael Shields
VIENNA, Aug 17 (Reuters) - Nationalised Austrian lender Hypo Group Alpe Adria made a first-half net profit for the first time since 2007 as bad debt costs fell sharply and business picked up in its core southeastern Europe market.
Chief Executive Gottwald Kranebitter called the results "a significant milestone in convincing the European Commission of our ability to survive".
The Commission, which cleared state aid for Hypo and is vetting its restructuring plans, last year questioned whether the bank could keep going.
Austria's sixth-biggest bank earned 5.2 million euros ($7.33 million) after tax and minority interests even after net interest income fell 13 percent due to non-performing loans and as it scaled back lending under orders from the EU.
Including the positive impact of fair-value adjustments on its own debt, it swung to a net profit of 71.6 million from a loss of nearly 500 million a year earlier.
Kranebitter declined to give an outlook for the full year but said its target of making a 2011 profit was unchanged.
Hypo took a 21.5 million euro hit from writing down the value of Greek debt. After selling some debt in July, its Greek exposure is a nominal 43 million euros, it said on Wednesday.
Hypo repaid some state-backed debt, reducing national and provincial guarantees by 1.4 billion euros to 19.7 billion and leaving it with 2.2 billion in excess liquidity. It said no capital market transactions were planned for the next 12 months.
Still, it had 9.6 billion euros in non-performing loans on its books at mid-year, and it acknowledged it would not have passed this year's European bank stress tests. Its Tier One capital held steady at 6.6 percent of risk-weighted assets.
Finance Chief Johannes Proksch said he hoped the bank had passed the zenith for amassing bad loans.
Hypo Alpe Adria, which had to be rescued in late 2009 to stave off a collapse that would have shaken the region, is in the process of winding down non-core assets and selling its businesses in Austria and Italy to focus on emerging Europe.
The Italian and Austrian units were among 10 big M&A deals Hypo aimed to clinch within 18 months, although Kranebitter said the environment for selling banks was "as bad as you can imagine".
He said many potential suitors were in the hunt, adding: "We have the time and the liquidity to do this in an orderly way."
Prosecutors in Germany, Austria and Croatia are investigating former managers, shareholders and business partners of Hypo and former owner BayernLB on suspicion they lined their pockets at the expense of the banks.
German landesbank BayernLB has sued the staff foundation at Hypo Alpe Adria, alleging the German bank was duped in 2007 into buying the Austrian lender.
The 50 million euro suit could be the first step by BayernLB -- which took a 3.7 billion euro hit on the acquisition -- toward going after Hypo's other former owners, who deny any wrongdoing. (Reporting by Michael Shields; Editing by Will Waterman and Erica Billingham)