* H1 pretax profit 100 million pounds, on revenue of 298 mln
* Capital market revenue down 10 percent
* Interim dividend up 5 percent to 8.8 pence
* Shares up 4.5 percent
(Recasts with derivatives strategy, fresh analyst quotes)
By Luke Jeffs
LONDON, Nov 18 (Reuters) - The London Stock Exchange plans to move into European derivatives trading by June as it looks to higher margin businesses to propel profit and help offset its shrinking core market, helping lift its shares.
The exchange, which also beat expectations with a 26 percent rise in first-half pretax profit driven by exceptional items and cost cuts, said it planned to muscle into a futures market dominated by arch-rivals Eurex and Liffe.
"European equity derivatives is an effective duopoly between Eurex and Liffe. We think there is room for a third (player)," chief executive Xavier Rolet said on a telephone conference call on Thursday.
LSE shares were up 4.5 percent to 749 pence by 1300 GMT. Rolet, who said market conditions were likely to remain mixed in the company's second half, has been battling the twin challenge of a declining British equity market in the wake of the credit crisis and competition from nimble new rivals.
The British equity market was 20.5 percent smaller in the six months to end-September, compared with the same period in 2008 -- before the financial crisis struck, while the LSE's share of equity trading has plunged to 51.3 percent from 95.8 pecent at the start of 2008, according to Thomson Reuters data.
"The LSE is interested in listed derivatives because its main area of equities execution is becoming squeezed and because derivatives represent a significant revenue opportunity given some 70-80 percent of the market is traded by Eurex and Liffe," Nomura analyst Ravi Singh said.
CHALLENGES
With low cost rivals such as Bats Europe and Chi-X Europe squeezing revenues, the LSE hopes to win a share of a derivatives market that, Rolet said, generated annual revenues of 1.2 billion euros ($1.6 billion) for Deutsche Boerse-owned Eurex and NYSE Euronext's Liffe.
The LSE faces three key challenges before it can start trading equity derivatives: building the trading platform; securing intellectual property rights; and clearing the contracts.
The LSE said it was working with 12 large clients on the platform, was talking about IP with FTSE, itself 50 percent owned by the LSE, and has struck a deal with its current clearing provider LCH.Clearnet to support the platform.
Rolet's derivatives pledge came as the LSE posted a 26 percent rise in first-half pretax profit to 100 million pounds ($160 million), helped by 18 million of cost cuts and a 5.6 million tax recovery, on revenue down 1 percent to 298 million.
Total income rose 1 percent to 318 million pounds.
The LSE, which owns the London and Italian stock exchanges and also runs smaller bonds and derivatives markets, has yet to explain what it called the "suspicious circumstances" that caused its European trading system Turquoise to crash for two hours on Nov. 2. (Editing by Dan Lalor) ($1 = 0.7331 euro = 0.6254 pound)