Diageo , the world's biggest spirits group, said markets were starting to recover and should turn around by mid-2010 after higher bonus payments and a minor sterling rally ate into its half-year earnings.

The London-based maker of Smirnoff vodka, Johnnie Walker whisky and Guinness beer missed forecasts with a 5 percent rise in six months to December earnings, sending its share price lower. It kept its annual growth target, which one analyst said the firm would now struggle to meet.

Chief Executive Paul Walsh said on Thursday he saw the early stages of a recovery with encouraging signs in emerging markets such as Latin America, Asia and Africa helping to drive underlying sales up 2 percent in the quarter to December following a 6 percent fall in the previous quarter.

We expect to see a second half (to June) turnaround with the top and bottom lines both growing. The encouraging signs are not universal but there are signs of a pickup in growth, Chief Financial Officer Nick Rose told a conference call.

But in North America and Europe, which account for 70 percent of Diageo's profits, half-year sales were down 6 and 5 percent as consumers drank less in the slow economic recovery, with Europe and especially Ireland and Spain seen very challenging.

'SLIGHTLY DISAPPOINTING'

The results are slightly disappointing.... We expect the speed of top-line recovery to be only gradual and the operating profit benefit to lag given the need to raise advertising and promotion, said analyst Philip Morrisey at broker Citi.

The group reported a 3 percent fall in first-half underlying operating profit, making meeting its reiterated full year target of a lower single digit percentage rise dependent on a big bounce back in the coming months.

This looks ambitious, given a continued weak consumer outlook in mature markets, reflected in a cautious outlook statement, said analyst Simon Hales at Evolution.

By 1040 GMT, Diageo shares were down 3 percent at 994 pence, lagging a 0.8 percent rise in the DJ Stoxx food and beverage index <.SX3P>, and dragging arch rival Pernod Ricard
, down 0.9 percent.

Diageo, which also makes Baileys liqueur, Captain Morgan rum and Gordon's gin, posted underlying earnings in the half year to end-December at 44.2 pence a share, below a consensus of 46.2p.

The interim dividend rose 5 percent to 14.6p a share.

FOREX BLUES

Cazenove analyst Matthew Webb cut his year to June earnings forecast by 2 percent to 71p to reflect lower than expected benefits from currency translation gains after sterling performed less poorly than the market had anticipated against other major currencies.

Diageo and Pernod have suffered from the global downturn and big destocking in the United States in early 2009, but both are now looking to benefit from the first signs of recovery.

Last month, Pernod reported sales fell 3 percent in its first half and repeated a comparable target to Diageo for 1-3 percent annual profit growth.

The Paris-based Absolut vodka and Chivas Regal whisky distiller will give full results on February 18.

(Reporting by David Jones; Editing by Dan Lalor, John Stonestreet)