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* Q1 net profit of 1.2 bln euros, ahead of forecasts

* Profit in Mexico up 19 pct in Q1

* Shares down 1.9 pct on lending revenue drop in Spain

By Jesús Aguado and Angus Berwick

MADRID, April 27 (Reuters) - BBVA reported a 70 percent rise in first-quarter profit on Thursday, helped by improving business conditions in the bank's largest market Mexico, though its shares fell due to weakness in Spain.

BBVA, Spain's second largest bank, warned in February that a fall in the Mexican peso on concerns U.S. President Donald Trump could rip up a free trade deal and build a border wall, would hit its business in the country, which provides 40 percent of profits.

But since hitting a record low in January before Trump's inauguration, the peso has rebounded over 50 percent to become the world's best-performing major currency as fears over Trump's trade policies moderated.

In Mexico, BBVA's profit was up 19 percent to 536 million euros, after falling 6 percent in the last quarter of 2016. BBVA said asset quality there was stable and its loan book had risen slightly from the previous quarter.

"The significant depreciation of the Mexican peso in 2016 has reversed since mid-January 2017, thanks to moderation from the United States with respect to future trade policy," BBVA said.

On Wednesday, Trump told the leaders of Canada and Mexico the U.S. would stay in NAFTA, one of the world's biggest trading blocs, for now. The Mexican and Canadian currencies rebounded in Asian trading on Thursday.

Overall, BBVA reported net profit of 1.20 billion euros ($1.31 billion) in the first three months of the year, beating analysts' forecasts.

The results benefited from a net gain of about 177 million euros from the sale in February of BBVA's its 1.7 percent stake in China Citic CNCB bank.

SPANISH INCOME SLIP

BBVA's net interest income (NII), a measure of earnings on loans minus deposit costs and a key driver of a retail bank's earnings, rose 4 percent from a year ago to 4.3 billion euros, although it fell from the previous quarter.

Analysts said a 3.8 percent slip in NII in Spain from the previous quarter to its lowest level since the first quarter 2014 was weighing on BBVA's shares.

BBVA's shares were down 1.9 percent by 0901 GMT after hitting a year high on Wednesday. They are up 18 percent over the past quarter against a 3 percent rise on the European STOXX banking index.

Shares in domestically-focused Spanish banks, such as Banco Popular, also fell on worries that BBVA's weak performance in Spain signalled that margins were still under pressure from record low interest rates and fierce competition for customers in a sluggish loan market.

"The share prices for Spanish banks already had risen in the weeks before and now that they are showing weaknesses at an operating level the shares have slipped," Pedro Cubillo, a fund manager at Spanish asset manager MG Valores, said.

Chief Executive Carlos Torres Vila said on a conference call with analysts he expected NII in Spain, where BBVA makes around a fifth of its profits, to remain flat this year.

Its fully-loaded core capital target ratio, a closely watched measure of a bank's strength, rose to 11.01 percent, in line with its target for the year, and compared with 10.9 percent at the end of December.

Its larger rival in Spain, Banco Santander, reported on Wednesday that it finished the first quarter with an equivalent capital ratio of 10.66 percent. ($1 = 0.9169 euros)

(Editing by Susan Thomas and Jane Merriman)