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BERLIN (Reuters) - BMW (BMWG.DE), the world's biggest luxury carmaker, said investment in technology and new models such as the i3 electric car would hold back fourth-quarter earnings, after it reported a bigger than expected drop in third-quarter profit.
The German group, which is spending heavily in a bid to stay ahead of rivals Mercedes and Audi, also said on Tuesday quarterly profits were weighed down by discounts to lure cash-strapped European buyers and warned demand for cars in the region might not rebound until the second half of next year.
European car sales slumped to their lowest six-months total in 20 years in the first half of 2013 amid record unemployment and government austerity measures, though there have been signs recently that demand is at least stabilizing.
Premium carmakers have fared better than mid-market rivals, particularly thanks to strong demand from China, and BMW defended its investment in launching 25 new models this year and next, including the all-electric i3 city-car that will hit showrooms this month.
"It's our goal to ensure the competitiveness of the group over the long term," said finance chief Friedrich Eichiner. "That's more relevant than short-term profit."
However, BMW shares fell as much as 4.8 percent, their biggest decline in four months.
BMW said earnings at its main autos division might take an extra 500-million-euro ($676 million) hit in the fourth quarter due to the cost of upgrading technology and expanding production.
The additional outlay could push the division's quarterly margin on earnings before interest and tax (EBIT) to the lower end of BMW's target range of between 8 and 10 percent, Eichiner said during a conference call.
Third-quarter operating earnings at the autos division, which accounts for over 90 percent of group revenue, dropped 6 percent to 1.55 billion euros, missing analysts' average forecast of 1.59 billion in a Reuters poll.
That reduced the division's EBIT margin by half a percentage point to 9 percent in the quarter, compared with 9.4 percent at Volkswagen's Audi (VOWG_p.DE) and 7.3 percent at Daimler's Mercedes-Benz (DAIGn.DE).
BMW's rivals are breathing down its neck. Audi has shrunk BMW's lead in luxury car sales to a mere 29,000 cars after nine months of the year, while Mercedes is thriving on demand for a string of redesigned sporty new compacts.
Third-quarter EBIT jumped 23 percent at Mercedes, which also includes the Smart city-car brand, while VW posted a 20-percent gain in operating profit, benefiting from record deliveries of premium Porsches and Audis.
But Arndt Ellinghorst, head of automotive research at London-based ISI, predicted BMW would reap the benefits of its investments.
"Once BMW's i start-up costs are diminishing, focus will return to growth," he said.
"BMW is trading on 9.7 times our 2014 earnings forecast which is attractive relative to Daimler on 11.2 times. Indeed, we expect BMW's 2014 group margin to be 270 basis points higher than Daimler, yet BMW (stock) is 13 percent cheaper."
BMW stood by its forecast for a full-year autos EBIT margin of 8-10 percent and a group pretax profit similar to last year's 7.82 billion euros, though it cautioned car market conditions might remain "volatile and challenging" in coming months.
The carmaker is counting on new models including the overhauled 5-Series saloon, the next generation of the X5 SUV and the 4-Series coupe to keep up its sales momentum.
Global deliveries, also including Rolls-Royce and MINI brand cars, may post a single-digit percentage gain to a new record this year, BMW said, reaffirming targets.
At 1350 GMT, its shares, which have lagged the European autos sector .SXAP by 14 percent this year, were down 3.1 percent at 80.98 euros.
($1 = 0.7402 euros)
Editing by Maria Sheahan and Mark Potter