(Adds analyst comment)
By Jennifer Clark
MILAN, July 30 (Reuters) - A profit warning from Fiat's U.S. unit Chrysler, which generates most of the group's net income, knocked the Italian automaker's shares lower on Tuesday even though it confirmed combined full-year targets.
In recent quarters, Chrysler's booming U.S. sales have compensated for Fiat's losses in Europe, where consumers have been buying fewer cars each year. Fiat, which owns 58.5 percent of Chrysler, plans eventually to merge the two carmakers.
Chrysler trimmed its full-year net profit forecasts to a range between $1.7 billion and $2.2 billion from $2.2 billion, due to a reduced outlook for vehicle sales and the costs of a major recall of Jeeps.
The company was due to provide more information during a conference call later on Tuesday.
"The market didn't like the Chrysler profit warning," said an analyst in Milan. "Chrysler's second quarter results were slightly better than expected, but the free cash flow was modest and below our estimates. The news is negative."
At 1145 GMT, Fiat's shares were down 4.0 percent at 6.05 euros in volatile trade, compared with a 0.81 percent rise in Italy's blue-chip FTSE MIB index.
Chrysler said it sees worldwide vehicle shipments at 2.6 million, from a previous 2.6 million-2.7 million. It confirmed revenue targets. Cash from operating activities fell to $977 million from $1.73 billion even as investments stayed about the same.
"As we have highlighted previously, the timing of product launches and capacity increases causes this year's performance to be biased to the second half," Fiat-Chrysler CEO Sergio Marchionne said in a statement.
Chrysler is spending on new model launches. In the first quarter, its profits fell 65 percent as it absorbed the cost of new-vehicle launches and a high-selling discontinued model, the Jeep Liberty, no longer fed through to the bottom line.
The Liberty's replacement, the Cherokee, will be in dealerships from August.
Net profit at Chrysler rose to $507 million in the second quarter from $436 million a year before.
Fiat said its group trading profit - earnings before interest, taxes and one-time items - was 1.03 billion euros ($1.37 billion), just above analysts' forecasts of 1 billion euros, as its loss in Europe narrowed and sales in Asia improved.
"Given that Fiat has reiterated guidance at the group level, this implies that the outlook for EU, Latin America and Luxury brands has been upgraded," Morgan Stanley analyst Laura Lembke said in a note.
In a separate statement, Fiat confirmed the combined group's 2013 financial targets, and said Fiat's losses in Europe narrowed in the second quarter to 98 million euros ($130 million) even as car shipments in the region fell 5 percent.
Fiat's competitors Ford and General Motors also reduced their losses in Europe in the second quarter, by cutting costs.
Fiat's net debt was 6.71 billion euros, against a forecast of 7.1 billion euros and compared with 6.5 billion euros at year-end.
($1 = 0.7545 euros) (Reporting by Jennifer Clark, Ben Klayman and Stephen Jewkes; Editing by Anthony Barker)