UPDATE 1-Outsourcing group Xchanging sees FY earnings in line

* Says market conditions remain challenging

* Cambridge IT business customers defer discretionary spend

(Adds more details)

LONDON, Oct 23 (Reuters) - British outsourcing group Xchanging (XCH.L) said on Friday it expects earnings for the year to be in line with the market's expectations, despite challenging conditions.

Xchanging said for the period from June 30 to date the business is performing in line with expectations, with the exception of the Bangalore-based Cambridge IT business in which it acquired a 75 percent stake earlier this year.

Customers in the Cambridge business have continued to defer discretionary spend, it said.

The weakness in IT services is expected to be offset by growth in the rest of the business, which is slightly ahead of that seen in the first half, Xchanging said in a statement.

Xchanging, which specialises in financial services and has BAE Systems, Deutsche Bank and Boots as customers, said the Cambridge integration should be complete by the end of the year and should be good for the company's international reach.

"We are confident that our global platform and broad customer base will continue to support profitable growth," the company said, adding that it also signed a new five-year contract with WorkCover New South Wales worth about AU$90 million.

Xchanging, established in 1999, is one of Britain's largest data processing and outsourced services companies. It provides services to customers in 42 countries and is expanding in the U.S., where it opened its new U.S. headquarters in Chicago on Tuesday.

Its shares, which have gained 16.9 percent in the past three months, were down 1.39 percent at 1127 GMT.

(Reporting by Sharon Lindores; Editing by David Cowell)