(Adds cost-cutting target, comments by CEO and analysts; refiled to delete repetitious wording in ninth paragraph)
* Q3 profit 1.6 bln euros, beats forecast
* Trading gains help, net income interest misses
* Bank to cut 2 bln euros in costs by 2016
* Shares up 0.4 pct
By Sarah White and Jesús Aguado
MADRID, Nov 4 (Reuters) - Santander, the euro zone's biggest bank, reported a sharp rise in third-quarter profits on Tuesday and said it would be cutting costs more aggressively to further improve margins.
Spain's largest bank by market value weathered the worst of the financial crisis and property market crash at home through earnings overseas, though a faltering economy in Brazil, one of its biggest income drivers, has weighed recently.
Now under the direction of Ana Botin, who was appointed as chairwoman in September after the death of her father, Emilio, the bank's net profit in the third quarter of the year increased 52 percent to 1.61 billion euros ($2 billion), beating analysts' forecasts as losses on problematic debts receded.
But the increase was helped by higher income from trading bonds and masked a slowdown in the pace of the recovery in its core lending business revenue, or net interest income (NII), to 7.47 billion euros, short of expectations.
NII is a closely-watched measure of earnings on loans minus deposit costs, and while it has been steadily rising at Santander quarter on quarter this year, growth slowed in the July-September period to 1.4 percent.
In Spain Santander's net income more than doubled from a year ago in the January-September period to 822 million euros but lending was still down 5 percent, echoing falls across other Spanish lenders and pointing to a slower economic recovery than some had initially expected.
The bank's shares were up 0.4 percent at 7.017 euros per share at 1203 GMT, when the Stoxx Europe 600 banking sector index was up 0.04 percent.
"Underlying divisional trends are less positive ... with results heavily supported by trading income," analysts at Credit Suisse said in a note.
Santander has also benefited from the quicker economic recovery in Britain with the UK unit, run by Ana Botin until her promotion, boosting net profits in the first nine months of the year by nearly 50 percent to 1.2 billion euros. But it said competition for mortgages in the UK had intensified, which was likely to pressure margins next year.
Santander UK, which now accounts for 20 percent of the group's net income, is expected to be spun off and listed in the next 18 months.
Group net profits for the nine months were up 32 percent at 4.36 billion euros. Volatile emerging market currencies weighed on earnings earlier this year, though this effect has lessened.
Santander said it is now aiming for 2 billion euros of cost savings across the group by 2016, up from a previous goal for 1.5 billion euros, after exceeding this year's targets.
The bank's costs fell 1.8 percent in the first nine months of the year, though they rose in the third quarter from the previous three months.
In particular expenses spiked in the United States, Chief Executive Javier Marin said, adding the bank had added staff there and was adapting to new regulatory requirements.
Santander has to submit a new capital plan to U.S. regulators in 2015, after an earlier one was rejected this year by the Federal Reserve.
Like most of its Spanish peers, Santander last month passed the European Central Bank health checks on the euro zone banks' balance sheets without needing extra capital.
It said, however, that its core capital solvency ratio at end 2014 under "fully-loaded" Basel III criteria -- which takes into account changes banks have to make under strict new rules by 2019 -- would be lower than expected at around 8.5-8.6 percent of risk-weighed assets.
That was due to several recent acquisitions, Marin said. That leaves it below most top peers in Spain, however, with BBVA's fully-loaded ratio standing at 10.1 percent at the end of September.
However, Santander said it would issue more bonds that can convert to equity and that it was comfortable with its capital levels. (1 US dollar = 0.7999 euros) (Editing by Clara Ferreira Marques and Greg Mahlich)