* Says fares may fall up to 9 pct in July-Sept
* Annual fare falls of 8 pct seen in winter
* Excess capacity seen in Spain, Italy, Portugal
* Profit up 55 pct year-on-year in quarter to end-June (Updates with share price fall; analyst quote)
DUBLIN, July 24(Reuters) - Ryanair warned rivals on Monday that it may cut its fares in late summer by as much as 9 percent from last year, triggering a share sell-off by investors concerned about the impact on profitability.
Europe's largest airline by passenger numbers, Ryanair has helped drive down short-haul ticket prices in Europe by increasing its capacity by 33 percent, or about 30 million seats, in the past two years.
Some investors thought higher fares in the three months to the end of June were a sign that a period of heavy discounting may be ending. But management made clear the annual increase was just a blip due to the timing of Easter and that prices would fall sharply in the coming months.
"It's a competitive market out there. You're looking at fares down anywhere between 7, 8, maybe as much as 9 percent," in the three months to Sept. 30, Chief Financial Officer Neil Sorahan told Reuters.
Annual falls are likely to average 8 percent in the six months to March 31, the end of Ryanair's financial year, he said.
While the average fare forecasts were unchanged from those given in May, some analysts had been expecting the declines to slow and Ryanair's share price was down 4 percent at 0815 GMT.
"I think the market had probably priced in that the fare guidance for the winter was very conservative and now they are realizing that it is actually realistic," said Davy transport analyst Stephen Furlong.
The comments sent shares in other European airlines down on Monday, continuing falls seen last week, with Lufthansa , Wizz, IAG and easyJet losing between 1 and 3 percent.
Ryanair beat analyst expectations with profit of 397 million euros for the three months to the end of June, compared to a company poll average of 366 million euros, after the timing of Easter helped lift fares by 1 percent on an annual basis.
But its forecast that it would make a profit after tax of between 1.4 and 1.45 billion euros in its financial year was below the average forecast by analysts polled by Ryanair ahead of the release for a profit of 1.488 billion.
Sorohan said part of the fall in average fares was due to lower fuel prices, but much was due to over-capacity in Spain, Portugal and Italy as charter carriers shift capacity away from Turkey and North Africa.
Lower average fares were impacted by sterling weakness and lower fees earned for checked bags following a change in policy that allows passengers to carry two bags on board.
Low-cost rivals easyJet and Wizz Air have both in recent weeks warned that average fare levels would continue to be under pressure over the key summer period.
In a sign it is not afraid of increasing capacity into a weak market for fares, Ryanair nudged up its traffic forecast for the year to the end of March to 131 million passengers from an earlier forecast of 130 million.
"There are a few guys out there who look like they are starting to find life difficult," Sorahan said.
Analysts from Goodbody said Ryanair's tactics would increase pressure on carriers such as Alitalia, Air Berlin , Monarch and Norwegian Air Shuttle.
"The read on this is that they see demand weakening substantially and need to stimulate growth through aggressive pricing," they said in a note. (Reporting by Conor Humphries; Additional reporting by Victoria Bryan in Berlin; Editing by Keith Weir)