* Underlying Q3 net 406 mln euros vs 349 mln expected
* Irish loan losses decline qtr/qtr
* Reduces exposure to peripheral sovereign debt (Adds details, background)
BRUSSELS, Nov 8 (Reuters) - Belgian financial group KBC posted a better-than-expected profit in the third quarter, driven by a strong performance in core markets in Belgium and eastern Europe.
The group said deposits and credit volumes were higher compared with the last quarter and last year.
Underlying net profit of 406 million euros ($517.85 million) beat the 349 million expected in a Reuters poll of six analysts.
KBC further reduced its exposure to sovereign debt from Ireland, Italy, Portugal and Spain to 1.6 billion euros from 2.3 billion at the end of the first half.
It recorded 129 million euros in loan loss provisions in its Irish business, down from 136 million in the second quarter.
The group repeated its guidance that Irish loan loss-provisions should be between 500-600 million euros for 2012.
Irish house prices grew at their fastest monthly rate in five years in September, rising 0.9 percent in the latest sign of stabilisation in the property market after peak-to-trough falls of 50 percent.
The group's tier-1 ratio increased to 15.3 percent at the end of September, and the disposal of its Polish unit Kredyt Bank and a sale of treasury shares should push this figure even higher, KBC said.
In October, KBC sold 18.2 million of its treasury shares through a placement with institutional investors, meeting a pledge to EU regulators and generating gross proceeds of 350 million euros ($453 million).
Though KBC has made all of the main divestments it agreed with European regulators in exchange for the financial aid it received from Belgium at the height of the credit crisis, it still needs to sell some smaller units.
Because the Belgian central bank had not yet given a further update about future capital rules, the group said it could give no update about the repayment of state aid it received.
It reiterated that it aimed to pay back 4.67 billion euros by the end of 2013. ($1 = 0.7840 euros) (Reporting By Robert-Jan Bartunek; Editing by David Cowell)