July 26 (Reuters) - Mercedes-Benz on Friday

narrowed its annual profit margin forecast for its core car

division as the German luxury automaker faces fierce competition

in China, though new models should lift sales in the second half

of the year.

The company said it now expected an adjusted return on sales

in the range of 10-11% this year, down from its previous target

range of 10-12%.

Mercedes' cars division achieved a 10.2% return on sales in

the second quarter, while its adjusted earnings came in below

analyst expectations.

Mercedes reported a 6% drop in sales in the first half, with

electric vehicle sales falling 17%.

Mercedes said the economic outlook was marked by

uncertainty, adding that it saw improving market sentiment in

Europe and "solid momentum" for sales and demand in the U.S.

market.

The automaker said, however, it had a "cautious view" on

China, where it expected strong competition in its entry-level

and core model segments, while it "seeks to successfully defend

its leading position" of its top-end car models.

"Sales and the model mix are expected to improve in the

second half of the year, supported by further market launches of

new models particularly in the Top-End segment," CEO Ola

Kaellenius said in a statement.

German automakers are struggling with lacklustre demand for

electric vehicles, coupled with tough local competition in

China, supply bottlenecks and persistently high interest rates.

The group reported a 27.5% fall in adjusted earnings in its

car division in the second quarter, against LSEG's estimate of a

26% decline.

At group level, earnings before interest and taxes (EBIT)

dropped in the quarter by 19.1% in line with LSEG's consensus.