Barclays Plc's underlying quarterly profit rose 5 percent as gains in retail banking and credit cards took up the slack from its investment bank, which suffered a third straight sharp fall in quarterly income.

Barclays said on Monday capital markets had remained difficult in October as the euro zone's financial problems deepened, and were likely to remain tough despite improvement since last week's announcement of plans to solve the crisis.

There's no question market conditions this year have been challenging and we'd expect that to continue in some way into next year, given the weaker economic growth we're seeing, said Chief Executive Bob Diamond.

Barclays has axed about 3,500 jobs this year, more than the 3,000 cuts that had been earmarked for the year in August, and Diamond said the trend could continue as he fights to revive profitability and slash costs.

Pretax profit in the third quarter through September reached 2.4 billion pounds. Stripping out a 2.9 billion pound gain on the value of its own debt and other one-off items, profit was 1.34 billion pounds, up 5 percent on the 2010 period.

Analysts said the weakness in the Barclays Capital (BarCap)investment bank had been taken up by improvement in other areas, notably UK retail banking and the Barclaycard credit card arm.

It does look as if all their businesses are making a contribution, which is always a decent sign, said Cavendish Asset Management fund manager Paul Mumford, whose firm owns around 1 million Barclays shares.

By 9:50 a.m. Barclays shares were down 2.1 percent at 197 pence, slightly firmer than a 2.9 percent drop in the European bank index.

Barclays and its domestic rivals face having to separate their UK retail banking operations under planned reforms to safeguard taxpayers, but the bank declined to say how much extra this could cost.

It cut its holdings of troubled eurozone sovereign debt -- from Greece, Spain, Italy, Portugal and Ireland -- by 31 percent to 8 billion pounds. Half of that is Italian government bonds, and 2.7 billion more is Spanish sovereign debt.

NOT THE SCENARIO FOR NEXT 3-5 YEARS...

Top-line income at BarCap, which is expected to provide more than half of this year's group profit, fell to 2.25 billion pounds, down 22 percent from the second quarter to be in line with the consensus forecast as capital markets activity was hit hard across the industry.

Analysts said that was a more resilient performance than U.S. and European peers, who have shown an average fall of about a third. BarCap typically outperforms during difficult markets and can lag growth when markets boom.

Revenue in its fixed income, currencies and commodities (FICC) dropped 16 percent from the second quarter -- better than expected -- but equities income slumped 40 percent and advisory income was down by a quarter.

BarCap's operating expenses were 1.8 billion pounds in the latest quarter, down 7 percent on the year but not as steep a fall as analysts had expected. Compensation accounted for 46 percent of income at BarCap, up from 43 percent a year ago.

Barclays' investment in U.S. money manager BlackRock Inc was marked down by 1.8 billion pounds, which it said had already been recognised in equity and regulatory capital.

Barclays said its underlying profit for the first nine months of this year was a shade over 5 billion pounds, up 18 percent from a year earlier.

This showed the benefit of diversity and underpinned rock solid capital, funding and liquidity, Diamond said, adding the bank did not intend to raise new equity capital.

Diamond said he also remained absolutely committed to his goal of improving return on equity to 13 percent by 2013. RoE was 8.1 percent in the third quarter, from 6.5 percent.

He had in June outlined bullish targets for income at BarCap, which analysts said may need to be scaled back.

We do expect tough conditions to remain, certainly for a while, but we would not factor in this being the scenario for the next three to five years, said Diamond, the American who took over as CEO at the start of this year after 14 years building up BarCap.

Losses on bad debts were 1 billion pounds in the third quarter, down 16 percent from a year ago, and have tumbled by a third this year.

(Additional reporting by Sudip Kar-Gupta and Sarah White; Editing by Dan Lalor and David Holmes)