UPDATE 4-Erste sinks as unveils $412 mln Iceland exposure

* Erste Group Bank holds 300 mln euros of Iceland bank debt

* Sticks to 2008 guidance

* To update company guidance with Q3 results

* Shares down as much as 17 pct, pare losses in afternoon

(Rewrites with Erste reiterating guidance, updates shares)

By Boris Groendahl

VIENNA, Oct 10 (Reuters) - Austria's Erste Group Bank (ERST.VI) reiterated its 2008 outlook on Friday after unveiling it holds 300 million euros ($412 million) in Iceland bank debt. Its shares dropped as much as 17 percent but later pared losses.

Erste, the third-biggest lender in emerging Europe, cut its 2008 profit forecast on Tuesday, while Iceland edged towards financial meltdown over the week and the government seized control of three of the country's biggest banks.

"Obviously this is not good for investor confidence," said analyst Marion Swoboda-Brachvogel of brokerage CA Cheuvreux. "They gave a profit warning just a couple of days ago and now this. You've got to wonder, what comes next?"

Analysts' estimates varied widely regarding the level of writedown the bank would be likely to incur on its Iceland debt, ranging from 50 percent of its value to the full amount.

Erste tried to calm the waters later in the day, saying most of the possible losses from the Icelandic exposure were already reflected in Tuesday's earnings outlook, and its shares pared losses to trade down 7.4 percent by 1422 GMT.

This compared with a 6.8 percent drop in the DJ Stoxx European banks index .SX7P, in which heavyweights including the Royal Bank of Scotland (RBS.L), Deutsche Bank (DBKGn.DE) and UniCredit (CRDI.MI) fell even more.

Swoboda-Brachvogel said she expected Erste to write down the Iceland debt by at least 50 percent, but possibly more, and that this would reduce Erste's net profit by at least 6 percent.

Wood & Co analyst Jiri Stanik, who revealed Erste's exposure in a note to clients on Friday morning, said his base case was a total writedown of the debt, which would lead to a 20 percent reduction in net profit.

"I admit this is a worst-case scenario, but this is right now my base-case scenario," Stanik said.

Erste said it would give an update on its targets with the release of its third-quarter results due on Oct. 30.