UPDATE 1-Australia's Foster's profit up; wine market tough

* Year net profit slightly below analyst forecasts

* Soft demand seen denting wine earnings in 2010 (Adds details)

MELBOURNE, Aug 25 - Foster's Group Ltd <FGL.AX>, Australia's largest brewer, posted a 4 percent rise in annual net profit as higher volumes for beer more than offset a slump in wine earnings, but warned that wine markets would remain challenging.

Foster's, which makes Beringer, Penfolds and Lindemans wines, said net profit before one-off items for the year to June 30 rose to A$741.5 million ($620 million) from A$715 million the previous year. That was slightly below analyst forecasts for a net profit before one-off items of A$746 million, according to IBES estimates.

"Trading conditions in key wine markets will remain challenging in 2010 due to the ongoing impact from recessionary economic conditions," Foster's said in a statement.

Global wine pre-tax earnings fell 7.3 percent, with the global recession hitting consumer demand and stores cutting inventory levels.

The maker of VB and Crown lager beers said the Australian beer market remained robust, with revenues up 5.3 percent in the year.

Foster's decided earlier this year to keep its struggling wine business, which has been a drag on earnings, rather than sell it in a weak market.

The decision to retain wine also made it a less attractive takeover target, analysts have said, because the poorly performing business acts as a poison pill to a potential suitor.

Instead Foster's has been working to structurally separate the wine and beer businesses in a bid to improve performance. It said on Tuesday the separation was complete and cost savings programmes were on track.

The plan reversed a previous strategy of having single sales teams selling beer and wine, which upset many customers including upmarket restaurants.

Foster's main local rival, Lion Nathan <LNN.AX>, is set to be taken over by Japan's Kirin Holdings <2503.T>.

Including one-off restructuring charges and writedowns of A$397 million that were previously flagged, Foster's reported net profit was A$438.3 million. The charges included redundancies and writedowns to vineyards and inventory.

Shares in Foster's have slipped 1.5 percent this year, against a rise of 19 percent in the broader market <.AXJO>.