* GM expects much bigger loss in Europe this year
* Still sees Europe economy flat to slightly deteriorating
* Expects flat to slightly higher overall fourth-quarter operating profit
* Shares up 8.8 percent
DETROIT, Oct 31 (Reuters) - General Motors Co reported a surprisingly strong quarterly profit on Wednesday on higher sales, mainly in the United States, and said it was targeting a return to break-even levels in its European operations by mid-decade.
Shares of the automaker rose nearly 9 percent in afternoon trading even as it said it expected to lose as much as $1.8 billion in Europe this year.
``We still have a lot of work to do, especially in Europe,'' GM Chief Financial Officer Dan Ammann said.
GM's third-quarter net income attributable to common shareholders fell to $1.48 billion, or 89 cents a share, from $1.74 billion, or $1.03 a share, a year earlier. On Tuesday, smaller U.S. rival Ford Motor Co reported a far higher-than-expected profit of $1.63 billion for the quarter.
Excluding one-time items, GM earned 93 cents a share, well above the analysts' average estimate of 60 cents, according to Thomson Reuters I/B/E/S. Earnings in the North American, International and South American units all came in above expectations.
Revenue rose to $37.6 billion from $36.7 billion. Analysts had expected $35.7 billion.
GM said it expected a full-year operating loss of $1.5 billion to $1.8 billion in Europe, depending on the level of restructuring that occurs in the fourth quarter. Last year, it lost $747 million in the region.
The company, which sells in Europe largely under the Opel brand name, said it was targeting results there to be slightly better in 2013 than in 2012 and to reach break-even by mid-decade.
GM still sees the European economy as flat to slightly deteriorating. ``We're not banking on a sharp turnaround ... at this point,'' Ammann told reporters on a conference call.
Opel has been a drag on GM's results, leading the automaker to push for changes at the European unit, which has lost a total of $16 billion over the past dozen years despite repeated rounds of job cuts. In the third quarter, GM Europe posted an operating loss of $478 million, in line with what analysts had expected.
GM Vice Chairman Steve Girsky, who is leading Opel's restructuring, said the company was targeting $500 million in fixed-cost savings in the region between 2013 and 2015.
He said 2,600 jobs at Opel would be eliminated this year through attrition and buyouts, bringing the total employed at the unit to about 37,350 people. He added that Opel plans next year to cut the number of work shifts at its assembly plant in Eisenach, Germany, to two from three.
STRUGGLES IN EUROPE
Opel's image has ``deteriorated'' over the last several years, Girsky said on a conference call with analysts. ``We know we're behind here, and we're working very hard to bring us back to where we were.''
GM's European unit had positive cash flow in the third quarter, although some of that was due to inventory reductions, he said. The company said the key to Opel's turnaround would be the launch of 23 new models through 2016, including the Mokka small SUV this year and the debut of the Adam minicar next year.
Ford has had similar struggles in Europe. The No. 2 U.S. automaker said last week that it would close three plants in the region to cut costs by as much as $500 million and signaled a willingness to do more.
Ford has said it expects to lose at least $3 billion in Europe over the next two years, including at least $1.5 billion this year. It expects to post a smaller loss in the region in 2014 before being profitable by mid-decade.
``While we are impressed by the swiftness of the Ford actions, we also recognize that GM is trying to do something more complex,'' Guggenheim Securities analyst Matt Stover said, pointing to GM's efforts to cut costs at its highly unionized German plants.
For the fourth quarter, GM said it expected overall operating earnings similar to or slightly better than those of a year earlier. Citi analyst Itay Michaeli called the forecast ``a bit of a letdown,'' given the strong third-quarter results.
In the fourth quarter, GM said it could benefit from a reversal of a significant portion of a tax reserve, known as a valuation allowance, on U.S. and Canadian deferred tax assets. At the end of September, those cumulative allowances totaled almost $39 billion combined, and eliminating some of that would reflect confidence in the company's financial prospects.
In the third quarter, GM's North American unit posted an operating profit of $1.82 billion as higher volumes and selling prices contributed $600 million to the quarter. Analysts had expected a profit of $1.4 billion to $1.6 billion.
However, GM's North American operating profit margin fell about 2 percentage points to 7.8 percent from a year earlier. That trailed Ford's 12 percent margin.
GM executives said they would close that gap as they replace aging vehicles with newer models like next summer's debut of the critical full-size pickup trucks. They said this should allow the company to price its big trucks more comparably with Ford's rival models, rather than having to offer the discounts of $500 to $1,000 per vehicle that it does now.
GM officials also said the company was about two years behind Ford in efforts to build cars on fewer platforms as a way to cut costs.
About 12,600 GM white-collar retirees have agreed to accept lump-sum payments in lieu of monthly pension checks, the company said. The buyouts will help cut $29 billion, or about one-fifth, of GM's global pension obligation.
Shares of GM were up 8.8 percent at $25.34 on the New York Stock Exchange.