UPDATE 3-United Airlines shares tumble as it vows to match low fares, expand capacity

capacity@ (Rewrites with share drop)

NEW YORK, Jan 23 (Reuters) - United Continental Holdings Inc shares fell more than 6 percent in after-hours trading on Tuesday as the airline said it plans to increase capacity even as it is locked in a price war with low-cost carriers, likely threatening its profit margin.

"The best way to compete with low-cost carriers is to match their prices," one of its executives said on an earnings call with analysts and investors. "We can't let low-cost carriers have price advantages in our hubs."

The warning spooked investors, who are keeping a close eye on United's bottom line as the company tries to prevail in a fierce fare war that has sent some ticket prices tumbling.

The No. 3 U.S. carrier by passenger traffic earlier reported fourth-quarter net profit of $580 million, or $1.99 per share, compared with $397 million, or $1.26 per share, in the year-ago quarter, helped by costly last-minute ticket purchases.

Excluding special charges, United reported profit of $1.40 per share, beating Wall Street's average estimate of $1.34 per share, according to Thomson Reuters I/B/E/S.

In the current period, higher labor costs, costlier fuel and the ongoing pricing battle are weighing on the carrier's profit margins. United added to investors' unease by saying it will continue to compete with low-cost airlines on price.

In the fourth quarter, United posted a 0.2 percent increase in passenger unit revenue, a closely watched measurement of an airline's success, after a posting a sharp decline in the prior quarter.

The Chicago-based airline's results follow a strong fourth-quarter performance and quarterly outlook by rival Delta Air Lines Inc, which reported better-than-expected profit earlier this month. (Reporting by Alana Wise; editing by Bill Rigby)