Lower bad debts propelled higher-than-expected profits at Barclays and Commerzbank on Thursday, but ongoing regulatory and economic uncertainty reined in investor optimism.

Barclays, Europe's sixth biggest bank by market capitalization, said half-year profits rose 44 percent to 3.95 billion pounds ($6.3 billion), above the average forecast of 3.4 billion from six analysts polled by Thomson Reuters.

Barclays' earnings followed a pattern set by peers such as HSBC and BNP Paribas earlier this week, who trumped earnings forecasts after a sharp drop in their bad debt charges.

Commerzbank also struck an upbeat tone over provisions on Thursday, as the German bank posted a second-quarter profit of 352 million euros.

Commerzbank said it now expected risk provisions of up to 3 billion euros in 2010, down from its earlier estimate of 3.8 billion.

However, Barclays shares were down 2.5 percent in early morning trade, as its Barclays Capital investment banking division showed signs of a slowdown during the second quarter. Barclays also said the economic outlook was still uncertain.

Belgian financial services group KBC reported reduced earnings from its dealing rooms, despite forecast-beating group profits in the second quarter.

The DJ Stoxx European bank sector <.SX7P>, which rose sharply throughout July after reassuring stress test results and a delay to tough new Basel III industry regulations, was down 0.3 percent.

Clearly the banking sector is gaining in momentum and it has been helped by the delay of Basel III, said Cedric Ozazman, an investment advisor Swiss financial services firm Reyl.

But I don't think the outperformance will last for a long time and I think the sector will move back in line with the market, added Ozazman, whose company manages around 4 billion Swiss francs in assets and currently holds Santander and BNP Paribas shares.

($1=.6265 Pound)

(Writing by Sudip Kar-Gupta; editing by Elaine Hardcastle)