International Airlines Group is to buy Lufthansa's British unit bmi to boost growth prospects at its Heathrow hub at a time when airline profits are falling due to higher fuel costs.

IAG on Friday reported a 31 percent fall in third-quarter profit, better than expected and outperforming peers, with analysts expecting a deal for bmi to help trading further.

IAG on Friday said it had reached an agreement in principle for the sale of bmi with Lufthansa with any deal subject to due diligence and regulatory clearances.

The company said it expects the purchase agreement to be signed in the coming weeks and for a transaction to be completed in the first quarter of 2012.

IAG, Europe's second-biggest airline group by value behind Lufthansa , said operating profit in the three months to the end of September fell to 363 million euros from last year's third-quarter profit of 528 million euros.

Revenues rose 2.2 percent to 4.49 million euros, helped by a 3.5 percent rise in passenger traffic during the period. IAG's fuel bill rose by a quarter to 1.39 billion euros during the quarter.

The company had been expected to report a third-quarter operating profit of 350 million euros, according to the consensus analyst forecast supplied by IAG.

We are confident of a higher level of profitability in the fourth quarter of this year, even after the negative impact of the high fuel price. We expect to deliver a 2011 full-year operating profit of around double the year 2010 profits, IAG's Chief Executive Willie Walsh said.

He added that the airline had seen softening demand in October, with premium and non-premium traffic up 1.9 percent - a slower rate of growth than in prior months.

IAG shares in London, which have fallen around 30 percent in the past six months, closed at 168.4 pence on Thursday, valuing the business at around 2.1 billion pounds

(Reporting by Rhys Jones; editing by Kate Holton)