UPDATE 2-Australia's Foster's profit up; wine market tough

* Year net profit at A$741.5 million, below estimates

* U.S. wine earnings slide

* Soft demand seen denting wine earnings in 2010

* Shares down 1.1 percent vs 0.6 pct fall in broader market

MELBOURNE, Aug 25 - Foster's Group Ltd <FGL.AX>, Australia's largest brewer, posted a 3 percent rise in second-half profit as firm beer sales more than offset a slump in wine earnings, but warned that wine markets would remain tough.

Foster's, which makes Beringer, Penfolds and Lindemans wines, said the global recession hurt demand for wine and forced stores to cut inventory levels. The company is partway through its third restructuring of the struggling wine business in a bid to improve performance.

Analysts said the results would have been worse if not for favourable currency movements as the Australian dollar weakened.

"It's quite clear the wine division is pulling down the overall results, the volume declines were pretty horrible but fortunately they were helped by currency from the U.S. side so that camouflages the overall bad result," said Fortis Investment Partners investment analyst Theo Maas.

Global wine pre-tax earnings fell 7.3 percent in the year to June 30 in the world's second-largest wine business, second to Constellation Brands <STZ.N>.

In the Americas, wine earnings were down 31.7 percent in constant currency terms, but adjusted for a weaker Australian dollar showed a rise of 8.7 percent.

Analysts at Citi told clients the unadjusted slide implied a slump of 57 percent in second-half wine earnings in the Americas.

Foster's shares were down 1.1 percent at A$5.36 at 0130 GMT.

"Trading conditions in key wine markets will remain challenging in 2010 due to the ongoing impact from recessionary economic conditions," Foster's Chief Executive Ian Johnston said in a statement. He did not give a profit forecast.

Second-half profit before one-off items rose 3.3 percent to A$330 million ($276 million) from A$319 million in the prior corresponding period, according to Reuters calculations.

For a graphic with profit details, click on:

http://graphics.thomsonreuters.com/089/AU_FOSQ20809.gif

JEWEL IN THE CROWN

Foster's is the dominant player in a domestic beer duopoly and its rival, Lion Nathan <LNN.AX>, is set to be taken over by Japan's Kirin Holdings <2503.T>.

The maker of VB and Crown lager beers said the Australian beer market remained robust, with revenues up 5.3 percent in the year, helped by new brands such as Pure Blonde.

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

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

Instead the company has separated its wine and beer businesses, reversing a previous strategy of having single sales teams selling beer and wine that upset many customers including upmarket restaurants.

Foster's posted charges in the second half to sell some vineyards and cut some wine brands, following hefty writedowns last year.

The company is still struggling to digest its 2005 acquisition of wine producer Southcorp, for which it paid A$3.7 billion at the top of the market for brands including Penfolds and Rosemount.

"This was probably one of the worst acquisitions in Australian history," said Fortis's Maas.

Foster's 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, slightly below analyst forecasts of A$746 million, according to Thomson Reuters I/B/E/S estimates.