The German carrier said on Thursday it would offer only 0.5 percent more seats this year instead of 1 percent, having already shrunk its growth plans several times in recent months.

Its shares rose 2.7 percent to 10.57 euros by 1212 GMT, outperforming the broader market, as Lufthansa reported consensus-beating quarterly profit. Investors hoped that limits to capacity would help boost margins and raise prices.

European airlines have been struggling in recent years with sky-high fuel prices, lower spending on air travel in Europe and fierce competition from low-cost carriers and fast-growing Middle East rivals.

Even budget carriers have had a tough time. Quarterly profit at Ryanair (RYA.I) slid 29 percent in the face of austerity, recession and stubbornly high fuel prices.

"Hedging mechanisms reduce the risk, but it is unlikely that the company will be able to compensate fully for the effect of extra costs by upping income - even with ticket price surcharges - in a market where competition remains tough," Lufthansa said.

Lufthansa's fuel costs were up 22 percent in the first six months of 2012 - both because oil prices rose and because the euro weakened against the U.S. dollar.

The carrier plans to reduce capacity by 2.5 percent for the winter 2012/2013 flight timetable and will offer 4.5 percent less capacity at its cargo business this year, compared with previous plans for a 2.0 percent reduction.

It now also plans to decommission 25 aircraft at its main Lufthansa airline this year as 40 new planes are delivered. It did not say how many aircraft it previously planned to take out of service.

ROBUST BOOKINGS

Many airlines have responded by shutting down unprofitable routes and limiting their spending. Air France-KLM (AIRF.PA) is aggressively cutting costs and earlier this week told unions there was no alternative to restructuring.

Lufthansa (LHAG.DE) is cutting 3,500 jobs, restructuring some businesses and now plans to keep an investment freeze in place for at least another six months as Chief Executive Christoph Franz tries to improve earnings by 1.5 billion euros by 2014.

Efforts paid off in the first half of 2012 as Lufthansa filled more seats on its planes and raised yields in Europe by 2.6 percent, helped partly by higher ticket prices.

Lufthansa's new finance chief Simone Menne told reporters on a conference call that pre-bookings in Europe were robust and so far did not point to a deterioration in demand due to the euro zone debt crisis.

Lufthansa said it still expected its 2012 operating profit to decline to the mid-hundreds of millions of euros from 820 million last year, but it said on Thursday that the forecast excluded about 100-200 million euros of restructuring costs.

In the second quarter, its operating profit rose more than a quarter to 361 million euros, exceeding by far a consensus forecast of 261 million euros in a Reuters poll.

The earnings were boosted by lower future obligations at Austrian Airlines - such as anniversary awards, severance payments and pension payments - due to restructuring there.

Lufthansa's results come one day ahead of comparable earnings figures from International Airlines Group (ICAG.L), formed by the merger of British Airways and Iberia. (Reporting by Maria Sheahan; Editing by Stephen Powell)

• A Permanent Economic Emergency