UPDATE 2-Low interest rates knock Austria's Erste Group

* Q3 operating profit falls 10 pct year-on-year

* Net profit 337.4 mln euros vs forecast 340 mln

* Shares fall 7 percent (Adds analyst comment, share price, detail)

VIENNA, Nov 4 (Reuters) - Low interest rates hit operating profit at Erste Group in the third quarter, the Austrian bank said on Friday, sparking a bout of profit taking in its shares despite an increase in net earnings.

The bank, which operates across central and eastern Europe, said its ratio of bad loans to total lending had improved and it was on track to double its annual dividend to 1 euro a share.

But a 10 percent year-on-year drop in operating profit raised doubts among some analysts about its future performance.

“The question here is how sustainable these profits are and I think what people here are doing is taking profits slightly because the stock has developed well in recent months,” said one analyst, who declined to be named.

At 1120 GMT, Erste shares were down 7 percent at 26.18 euros, within a European banking index down 1.6 percent. The stock hit a high for this year of 29.59 euros late last month.

Net profit rose about 22 percent year-on-year to 337.4 million euros ($374.4 million) in the three months to Sept. 30, compared with an average forecast of 340 million euros in a Reuters poll of analysts. The bank’s bad loan ratio fell to 5.5 percent from 7.4 percent a year earlier.

Erste was among the dozen worst-performing banks in a stress test of 51 major European lenders this year, but said on Friday it was well within bounds set by supervisors such as the European Central Bank.

“Erste Group already significantly exceeds all regulatory requirements to be met by 2019,” Chief Executive Andreas Treichl said in a letter to shareholders, adding solid economic growth in the region had driven rising loan demand.

Erste’s fully loaded common equity tier 1 ratio, a measure of capital strength and the main yardstick in the stress test, rose to 12.7 percent at the end of the third quarter from 12.0 percent at the end of 2015, the point the test was based on.

“Interest income from government bond investments has been eroding slowly but steadily,” Treichl said, highlighting the difficulties banks face from low interest rates.

He added, however, the bank should in future be able to pay stable dividends. Asked in a conference call with analysts what that meant for the proportion of earnings paid out as dividends, he said: “There is an upside potential”.

$1 = 0.9008 euros Editing by Keith Weir and Mark Potter