* H1 EBITDA 5.01 bln eur vs 4.9 bln Reuters poll average
* EBITDA at Russian division fell by a quarter
* Keeps 2014 view, expects 3rd straight year of falling profits
* Shares up 4.5 percent, biggest gainer on Germany's DAX index (Recasts, adds CFO comments on Russia, context)
By Christoph Steitz
FRANKFURT, Aug 13 (Reuters) - Germany's biggest utility E.ON posted a 12 percent drop in first-half core profit, hit by a weakening currency in Russia, its most important foreign market that is the target of Western economic sanctions over Ukraine.
E.ON on Wednesday said earnings before interest, tax, depreciation and amortisation (EBITDA) at its Russian energy business declined by a quarter due to a drop in the rouble, and warned the currency could fall further.
The rouble has dropped 7 percent against the euro so far this year, as the Ukraine crisis has intensified.
The sanctions imposed on Russia's defence, oil and financial sectors in response to Moscow's support for separatists waging an insurrection in Ukraine are intended to hurt an already weak economy.
Some German companies operating in Russia, including car manufacturers and drugmakers, have already said the crisis was hurting their businesses.
The Ukraine crisis is the latest blow for E.ON which, like other German utilities, has seen its profits and share price tumble in an energy sector shake-up that has promoted solar and wind generation at the expense of utilities' gas-fired power stations.
Investors and analysts have pointed to Russia as a potential source of risk for the company, whose total investment in the country will grow to 10 billion euros ($13.4 billion) next year.
E.ON sells electricity in Russia through E.ON Rossiya OAO . It also gets up to half its gas from Russia's Gazprom and owns a quarter in Yuzhno Russkoye in Siberia, one of the world's largest gas fields.
Chief Financial Officer Klaus Schaefer said the company was not directly affected by sanctions, but the weakening rouble was a concern.
"If you look at the forward rates for the rouble you'll also know that there are further devaluations possibly out there," Schaefer told analysts during a call.
Schaefer said profits were expected to recover in rouble terms next year, boosted by the 800 MW power unit at its Berezovskaya plant that is expected to enter service later this year.
Shares in E.ON, whose market value has slumped by nearly three quarters to about 27 billion euros ($36 billion) over the last six years, were up 4.5 percent on Wednesday after group results beat analysts' forecasts.
Some analysts see recovery potential for the shares in the second half of the year, provided the company continues to reduce debt and if there is progress in creating a so-called capacity market - government payments to keep essential loss-making power plants running.
E.ON has a price-to-book ratio of 0.8, lower than the 2.2 of smaller rival RWE and the 1.1 for European utilities, according to Thomson Reuters Starmine.
Net debt fell to 29.7 billion euros at June 30 from 31.1 billion at the end of March.
"We believe there is the potential for structural change in Germany ... alongside nuclear compensation resolution that will eventually improve E.ON's prospects," RBC Capital Markets analyst John Musk wrote to clients, keeping an "outperform" rating on the stock.
Nine out of 32 analysts covering the stock recommend buying shares, while 10 analysts rate the stock a "sell", according to Thomson Reuters data. The remaining 13 analysts have a "hold" rating.
Group EBITDA fell 12 percent to 5.01 billion euros, beating the 4.9 billion average forecast from analysts, driven by E.ON's generation unit, where earnings increased by more than a quarter due to lower spending on Germany's nuclear fuel tax.
E.ON said it expects a third straight year of falling profits, maintaining forecasts for 2014 EBITDA of 8-8.6 billion euros and underlying net income of 1.5-1.9 billion.
$1 = 0.7484 euro Additional reporting by Daniela Pegna; Editing by Erica Billingham