* Santander Q2 profit up 38 pct to 1.45 bln euros
* Net interest income flat from a year ago
* UK, Spain drive recovery in earnings
* Falling provisions also boost bank
* Santander shares fall as Argentina weighs (Adds CEO comment on outlook, shares, analyst comment)
By Sarah White and Jesús Aguado
MADRID, July 31 Santander's second-quarter profits jumped by 38 percent thanks partly to an economic rebound in major markets Spain and Britain and the bank said it was on course for sustained profit growth.
Santander, the euro zone's biggest bank by market value, had been relying heavily on its Latin America businesses to make up for problems in Spain during the country's property market crash and economic downturn, which hit earnings.
With the Spanish and British economies strengthening, that earnings pattern is shifting. Santander's British business made up 20 percent of profits in the second-quarter, overtaking Brazil as the top contributor.
Net income from continental Europe, which includes Spain, but excludes Britain, rose 75 percent in the first half of 2014 from a year ago. This contrasts with a 16 percent fall in Latin America, where weakening currencies also dragged on earnings.
"We are on the path for sustained growth regarding profits," Chief Executive Javier Marin told analysts on a conference call.
"The second quarter underscores the change of trend shown since the start of the year in mature markets."
Like rival BBVA, which earlier this week also beat second-quarter forecasts, Santander managed to ride out the Spanish downturn without group losses by offsetting writedowns with income overseas.
Now Santander is betting on its home market to power stronger profits in the next few years and, like BBVA, it has invested in domestic consumer finance acquisitions.
Santander's Spanish earnings reflected a slow turnaround already shown by smaller rivals, with bad loans as a percentage of total credit down slightly to 7.59 percent at end-June, below a sector average. Entries of new soured debts fell from March.
Santander was also one of the few banks in the country to increase gross lending quarter on quarter. A credit crunch is still a threat to the recovery, even as Spain registered its fastest economic growth since before the financial crisis in the second quarter.
In Britain, the bank's second-quarter profits rose 4.6 percent from a year ago on a local currency basis to 325 million pounds ($549 million). The business is run by Ana Botin, daughter of Santander chairman Emilio Botin and she is seen as a contender as the 79-year-old's successor.
The British arm has been restructuring, pulling back on home loans to refocus on high-margin small business lending and personal current accounts. Marin said a long-mooted flotation would not happen in 2014 or 2015.
Ana Botin said: "We are making very good progress ... that means we have a huge opportunity to continue growing for 10 years down the road, and that's important as we prepare the business for the IPO (initial public offering)."
Across the group, net interest income - or earnings on loans minus funding costs - rose 0.4 percent from a year ago to 7.37 billion euros ($9.87 billion) in the second quarter, beating expectations for a slight drop in a Reuters poll.
Net profit was 1.45 billion euros, up 38 percent from just over 1 billion euros in the April-June period last year.
Falling bad debt charges also helped the bank, though analysts were more encouraged by underlying revenue trends, even in Brazil, where Santander has struggled in recent quarters as the country's economy has slowed.
"Overall, solid numbers by Santander, confirming the stronger momentum the bank has started to enjoy since the beginning of the year, which we see accelerating further into the second half," Credit Suisse analyst Ignacio Cerezo, who rates the stock "neutral", said in a note.
Santander has launched an offer to buy out minority shareholders in its listed Brazilian arm, adding on Thursday this was on track for completion in the third quarter.
Santander shares were down 1.45 percent by 0930GMT to 7.58 euros per share, though they were outperforming the broader European banks index where an Argentina debt default weighed on markets.
Santander is also present in Argentina but said it expected no material impact on the bank from any possible default.
($1 = 0.7466 Euros) ($1 = 0.5923 British Pounds) (Additional reporting by Steve Slater in London, Editing by John Stonestreet and Jane Merriman)