* Q3 op. profit 204 mln euros vs 190 mln poll avg, in range
* Says Q4 prices, deliveries seen flat from Q3
* Seen lagging peers, shares drop 4 percent
(Adds CEO comment, detail, updates shares)
By Victoria Klesty
HELSINKI, Oct 28 (Reuters) - A deeper shade of red than expected at its key paper business and strong earnings from its peers meant a 56 percent jump in third-quarter profit at UPM-Kymmene failed to impress investors on Thursday.
The Finnish company said operating profit, minus one-offs, was 204 million euros ($281.7 million) for July-September, due to better performance at its pulp and electricity units.
That was higher than the average forecast of 190 million euros in a Reuters poll of banks and brokerages but within the estimated range. The company also reiterated its second-half profit would rise from the first half.
However, it was not enough to prevent UPM's shares falling 4 percent to 12.36 euros at 1103 GMT, compared with a 0.4 percent rise in the STOXX Europe 600 Basic Resources Index.
"Markets were expecting them to beat the forecasts by more. I think there is some disappointment with the paper division," said Evli analyst Markku Jarvinen.
"The pulp division performed tremendously, as was expected, but Stora Enso's result (on Wednesday) ... as a whole, beat forecasts by more than UPM did."
International Paper and its Finnish peer Stora Enso tore past quarterly earnings forecasts on Wednesday, helped by rising paper prices.
Shares in Stora were 2.5 percent lower on Thursday, while smaller rival M-real was down 1.5 percent.
PRICE RISES
UPM-Kymmene's paper division made an operating loss of 64 million euros due to significantly higher fibre costs than last year, it said in a statement. Analysts' forecasts had ranged from a profit of 10 million euros to a loss of 39 million.
"We aim to increase prices in new contracts to compensate for increased raw material costs," Chief Executive Jussi Pesonen said in the statement. UPM said it expects the average paper price in the current quarter to match third-quarter levels and paper deliveries to be unchanged.
Pesonen said UPM had a number of business areas with growth ambitions, including pulp, but that funds would be channelled towards raising profitability at its European paper operations.
"The main priority is consolidation and fixing the European paper business," Pesonen told a conference call.
The company said it was still in talks to buy debt-laden Myllykoski, repeating last month's comment that a number of issues are unresolved.
Privately held Myllykoski has paper mills in Finland, Germany and the United States.
($1=.7242 Euro)
(Editing by Michael Shields and David Hulmes)