UPDATE 3-Daimler warns on profits for 2013 'as market worsens'

* Sees EBIT at 8 bln eur in 2012, no longer 9 bln

* 2013 divisional margin targets won't be met

* Mercedes plans to cut costs by 2.0 bln eur by end-2014

* Q3 EBIT was 1.92 bln eur vs Rtrs poll estimate 1.87 bln

(Adds analyst, planned cost cuts at Mercedes)

FRANKFURT, Oct 24 (Reuters) - Germany's Daimler warned on Wednesday that it would miss its earnings forecast this year by about 1 billion euros and would not improve profit margins next year as expected, blaming ``significantly more difficult market conditions.''

To combat the accelerated slump in the western European car market, Daimler revealed plans to cut 2 billion euros in costs by the end of 2014 to support sagging returns at its core Mercedes-Benz Cars division, the bulk of which would be front loaded.

The luxury carmaker, in financial results inadvertently released a day ahead of schedule, said it now expected only 8 billion euros ($10.38 billion) in earnings before interest and taxes (EBIT) from its ongoing business in 2012, rather than the original outlook for flat profits of about 9 billion.

``Due to the economic challenges, Daimler will not match the high prior-year EBIT in full-year 2012, but will still post good earnings once again,'' Chief Executive Dieter Zetsche said in the statement sent out by email.

Most analysts no longer expected the car and truck maker to maintain its forecast for 2012, which was supposed to be a ``transitional year'' that would pave the way next year for the group to hit divisional targets that had been in place since February 2011.

``We regard Daimler's Q3 numbers combined with the muted outlook for the rest of this year and 2013 as a major setback for the Daimler bulls. We continue to believe investors are finding better risk/return in VW and BMW,'' Credit Suisse analyst Arndt Ellinghorst wrote following the results.

Earlier on Wednesday, Volkswagen reaffirmed operating profit would be flat this year, while BMW's chief financial officer told Reuters in an interview that the group would retain its 2012 outlook.

Bernstein analyst Max Warburton called its decline versus BMW and Volkswagen ``saddening,'' seeing little hope for investors over the next 12 months in part because he expects Daimler will have to cut its dividend either for this year or the next.

Daimler's CEO had already scaled back his ambitions somewhat, saying last month that the Mercedes division would fall short of its profit target despite record vehicle sales.

He had also cast doubt on the 2013 goal of raising the EBIT margin (earnings before interest and tax) for Mercedes to 10 percent, which Zetsche has aimed for since May 2010.

In the statement on Wednesday, Daimler said Mercedes would only earn 4.4 billion euros this year compared to the 5.2 billion originally sought. All other industrial divisions -Trucks, Vans, and Buses - were each forecast to earn roughly 200 million euros less than previously expected.

Daimler added that it could no longer achieve its divisional EBIT margin targets next year, which included reaching 10 percent at Mercedes and 8 percent at Trucks.

Last year they were 9 percent and 6.5 percent, respectively.

``The achievement of those targets has become much more challenging due to the significantly more difficult market conditions prevailing at present,'' the Daimler statement said.

``The group assumes that the targets will be not met until a later date, but continues to pursue them vigorously, with the support of measures taken and programs initiated in all divisions,'' it added.

A significant portion of the planned 2 billion euros in cost cuts at Mercedes will be achieved by the end of 2013, in part by reducing fixed costs, spending for research and development and fixed capital investment.

The company also said its third-quarter operating profit dropped 2 percent to 1.92 billion euros, better than the average forecast of 1.87 billion given by analysts in a Reuters poll of 12 banks and brokerages.

Daimler burned through 200 million euros in cash during the third quarter mainly due to inventory stockbuilding of the new Mercedes A-Class ahead of its September launch. Net liquidity in its industrial business shrank to 8.21 billion at the end of September - its lowest level since the end of the first quarter in 2010.

Concerned by the high level of cash burn so far this year even before making a substantial future payment needed to increase its stake in its Chinese import sales company, Bernstein's Warburton recommended investors steer clear of Daimler for now.

``Arguments have been put forward for Daimler - arguments based on model cycle and an element of 'surely it can get better.' One day Daimler will likely get better,'' he wrote.

``But right now it is hard to see why.''

($1=0.7711 euros)

(Reporting By Christiaan Hetzner; Editing by Tim Dobbyn and Richard Chang)