BMW posted a 7% drop in second-quarter pre-tax profit on Thursday, a narrower drop than feared as currency and interest rate hedging cushioned the fall, but sales skidded lower, Reuters reported.

The report said BMW pre-tax profits dropped to 947 million euros ($US1.08 billion), while net income fell 9.7% to 568 million euros, both well above analysts' expectations and the company's most recent guidance.

But Reuters noted that sliding demand for its core luxury brand, particularly the 5-series saloon which is currently being replaced, and the effect of a strong euro hit the group's revenues, which fell a sharper-than-expected 12%.

"The numbers came in higher than we were expecting. Clearly they have taken a hit on currency, but despite the high spending the numbers look very solid," Merrill Lynch analyst Stephen Reitman, who rates BMW stock "buy", told Reuters.

The news agency said BMW had been expected to post a 17% drop in pre-tax earnings to 848 million euros in the three months to the end of June from 1.02 billion, according to the average forecast of 25 analysts surveyed in a Reuters poll.

A company spokesman told Reuters the result was boosted by financial instruments used to protect against interest rate and currency moves - excluding those effects, pre-tax profits fell 18% to 875 million euros from 1.06 billion a year ago.

"We have various financial instruments such as hedging against interest rates or currency effects. In some quarters these can have a positive effect, as they have this time round," the spokesman told Reuters.

BMW repeated it was aiming for 2003 profits at the same level as last year, when it posted pre-tax earnings of 3.3 billion euros, Reuters said.

According to the news agency, analysts applauded the performance of BMW's core cars business, where pre-tax profit fell around 20% as expected despite a 19% rise in research and development costs, as it launches more new models than ever before.

Revenues dropped 11.7% to 10.24 billion euros, Reuters added, and the company delivered 5.5% fewer BMW-badged cars to customers in the first six months than in the same period a year earlier, mainly due to weaker demand for the outgoing 5-series.

The group - which also owns the Mini and Rolls-Royce brands - is banking on the new 5-series to boost sales in the second half of the year and help it sell more than the 1.057 million vehicles it sold in 2002, while keeping profits flat, Reuters said.