WRAPUP 1-LATAM Airlines struggles with Argentina, Brazil headwinds
* Carrier's Argentine domestic business at risk after order
* Quarterly net loss widens at Latin America's largest airline
* Company says margins will return to pre-merger levels
* Shares fall more than 5 percent
(Recasts, adds comments from conference call, Argentina confirmation and quotes, updates prices)
SANTIAGO, Aug 21 (Reuters) - LATAM Airlines Group SA, which created Latin America's largest air carrier just over a year ago, is battling storms outside its home country, with its Argentine domestic operations uncertain and Brazil's weak economy dragging on its earnings.
LATAM , which was formed when Chile's LAN took over Brazil's TAM in 2012, said on Wednesday it was weighing legal action after Argentina ordered it to vacate its hangar at Buenos Aires' domestic Aeroparque airport within ten days..
Without the use of the hangar, it would be impossible to maintain LAN's short- and medium-range fleet within Argentina, putting in danger its entire domestic operation, a company spokesman in Buenos Aires said.
News of Argentina's order coincided with the release of LATAM's second-quarter results, which disappointed the market with a wider-than-expected loss.
The group reported a loss of $330 million in the three months to June late on Tuesday, wider than analysts' expectations for a $276 million loss.
On Wednesday, LATAM's shares slid 6 percent, extending a fall in which its market value has fallen by more than half since the merger was completed in June 2012.
However, the quarter is traditionally the weakest, and the loss was narrower than $449 million a year ago, according to company figures revised to reflect the merger.
Compounding its woes, on Tuesday the airline's cargo unit LAN Cargo became the ninth to be convicted after a Canadian investigation into cargo price-fixing, which resulted in a fine of $938,000.
LATAM's problems are a far cry from the record of the Chilean flagship airline that was once a darling of the market, considered a model of efficiency and one of the few to hold investment grade debt.
"I think the only way the shares will head back up is when the company begins to deliver effectively," said Pablo Alvarez, an analyst at Banco Penta in Santiago.
The Argentine decision is the latest salvo in a long-running political spat that has seen LATAM's regional ambitions collide with Argentina's increasingly protectionist policies.
The latest decision, handed down by Argentina's National Airport Agency on Tuesday night, affects domestic flights out of Aeroparque airport.
The decision was part of a wider set of actions against LATAM Airlines in Argentina, said Roberto Alvo, vice president for strategic planning and development.
"Even though it's early to evaluate the impact of the measure, we believe the decision is illegitimate, and we will evaluate taking every legal action necessary to (uphold) our contract," Alvo said.
He added that LAN's international operations from Argentina would not be affected.
In recent years Argentine President Cristina Fernandez has introduced protectionist trade policies, currency controls and heavy regulation that initially played well with her core Peronist support base but have made the country an outcast in international markets.
In 2012, LAN Argentina had about 32 percent of domestic market share to state-owned Aerolineas Argentinas' 66.5 percent. Around 2.3 million passengers flew with LAN Argentina last year, according to LATAM data.
Brazil's slumping economy and real currency have become an increasing headache for the airline. Domestic operations there make up over one-third of the airline's total passenger operations.
LAN has been cutting costs and reducing flights at TAM as it attempts to convince investors it can do the same for the merged group as when it was the Chilean flagship airline and boasted double-digit margins.
In the second quarter of 2013 LATAM's operating margin was 1.3 percent, and the company said it was targeting a margin of between 4 percent and 6 percent for the full year 2013.
"We see no fundamental reason to think about not being able to come back to the previous LAN margins," Alvo said on a conference call on Wednesday.
(Additional reporting by Antonio de la Jara and Anthony Esposito in Santiago and Alejandro Lifschitz in Buenos Aires; Editing by Gerald E. McCormick, Chizu Nomiyama and Kenneth Barry)