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UPDATE 2-Finnish pulp, paper maker UPM posts strong profit, new cost cuts

* Q3 adjusted op profit 351 mln euros vs f'cast 321 mln

* Pulp prices increase 12 percent

* Cuts costs in paper business

* Looks to invest in biochemicals

* Shares up 1.6 percent (Adds cost cut plan, updates shares)

HELSINKI, Oct 24 (Reuters) - Finnish pulp and paper company UPM announced new cost cuts in its troubled paper business on Tuesday as rising pulp prices helped quarterly profits beat market expectations.

UPM is the world's largest maker of graphic papers such as newsprint and magazine paper, where demand is falling in the West due to a shift to digital publishing.

The group has protected profitability with cost cuts and by focusing on pulp, needed not only to make paper but also in tissue products and packaging board, giving it a brighter outlook than paper.

The company announced it would close a magazine paper machine at a plant in Minnesota in the United States and streamline operations in Dorpen, Germany to save around 30 million euros ($35 million) a year.

An estimated 223 jobs will be affected in Germany and 150 in the United States, it said.

"During the last years, the demand for graphic papers has been declining - and the decline is expected to continue... we have to adjust our operations to prospective customer demand," Winfried Schaur, a senior executive at UPM's paper business, said in a statement.

UPM said its pulp prices rose by 12 percent in the third quarter from a year ago due to strong demand in China.

The group's total adjusted operating profit rose 12 percent from a year ago to 351 million euros, compared with an average analyst expectation of 321 million.

Shares in the company rose 1.6 percent by 1335 GMT.

"UPM's profit machine has changed gear, the bottom line is clearly above forecasts ... But they weren't able to increase their core EBITDA (earnings before interest, tax, depreciation and amortisation) nor cash flow from high levels," analysts at Inderes Equity Research, who rate the stock "reduce", said.

UPM said it was considering building a new biochemicals plant in Germany, which would cost hundreds of millions of euros. The plant is aimed at replacing fossil-based chemicals with wood-based materials for products including textiles, bottles, plastics and cosmetics, the company said.

UPM also said it plans to spend 50 million euros on expanding its plywood mill in Russia. ($1 = 0.8493 euros) (Reporting by Jussi Rosendahl and Tuomas Forsell; Editing by David Holmes and Adrian Croft)