ING Groep turned a small profit after three quarters of heavy losses, but the profit was well below expectations as real estate writedowns drove the banking business to a surprise loss.

The writedowns, a 30 percent increase in year-end cost-cut targets and uncertainty over the financial group's ability to wean itself off state aid raised fresh questions about how aggressive its asset sale program will have to be.

ING took a hit of nearly 700 million euros on its real estate portfolio, and said it is reviewing additional strategic options to pay back the 10 billion euros in emergency aid it took from the Dutch state last year.

Combined with the ongoing review of its aid package at the European Commission, the statement raised speculation about whether ING will have to sell more assets than it forecast when it announced a restructuring in April.

ING shares dropped sharply, wiping out a big chunk of the gains they made in the last month. Steep declines in the value of new business and single premiums in its European insurance operations appeared to weigh on competitors as well, with Aegon down a day before it reports its earnings.

KBC Securities downgraded ING to accumulate from buy, while SNS Securities said it was somewhat disappointed with the results and the ongoing uncertainty.

'BACK TO BASICS' REAFFIRMED

ING is in the midst of a worldwide cost-cutting program that includes 6 billion to 8 billion euros in asset sales. The company reaffirmed those targets Wednesday and said it has already identified which assets to sell.

Sources close to the program have told Reuters in recent days that ING aims to sign a deal to sell Swiss and Asian private banking assets in September.

What is unclear, though, is how much further than the program ING may have to go. ING raised its cost cutting target to 1.3 billion euros from 1 billion euros, having reached half of the initial target.

Floris Deckers, the chief executive of Dutch private bank Van Lanschot , told Reuters on Tuesday he expects many of the European banks that took state aid to be forced into divestitures by the EC.

Analysts from KBW Securities said the EC comments may give investors pause, given their cautious nature.

RESULTS DISAPPOINT

ING's second-quarter net profit was 71 million euros, down from 1.92 billion euros a year earlier. The consensus of 14 analysts polled for Reuters was a profit of 275 million euros.

That contrasts sharply with Belgian bancassurer KBC , which surprised the market last week with stronger-than-expected results on cost controls and gains in its trading income.

After surprising analysts with larger-than-expected loan losses in the first quarter, ING posted loan losses of 852 million euros in the second quarter. Analysts expected a figure of 776 million euros.

The company said it expects loan losses at or around the same level in the second half of the year.

The banking unit lost 204 million euros pre-tax on an underlying basis, driven by the real estate writedowns; analysts expected it to earn 444 million euros.

The insurance operations, on the same basis, earned 278 million euros versus a consensus forecast of 123 million euros. All three insurance regions were profitable, though ING said the biggest drivers were low claims levels in the United States and lower costs and sales expenses.

ING shares were down 4.21 percent at 8.732 euros at 1011 GMT in Amsterdam. Since a recent bottom of 6.64 euros on July 13, the stock is up just over 37 percent, fueled in part by talk of pending asset sales.

Over the same period the Dow Jones STOXX Bank Index <.SX7P> is up about 23 percent.

(Reporting by Ben Berkowitz; Editing by Hans Peters)

($1 = 0.7079 euro)