UK supermarket Morrisons raises profit outlook

* Price war drives 27 pct fall in 2015-16 profit

* First (Other OTC: FSTC - news) quarterly rise in underlying sales in 4 years

* Sees (Shanghai: 600481.SS - news) opportunity for 50-100 mln pounds of extra profit

* Deal with Amazon struck last week

* Shares (Berlin: DI6.BE - news) up 41 pct over last 3 months (Recasts with CEO, investor comment, shares)

By James Davey

LONDON, March 10 (Reuters) - Morrisons, the smallest of Britain's four main supermarket groups, raised its profit outlook on Thursday after identifying ways to broaden its business including a deal to supply food to online giant Amazon .

The group, based in the northern English city of Bradford, said it expected 50-100 million pounds ($71-$142 million) of additional profit in the medium term from areas such as online business, wholesale, manufacturing and lower interest costs.

Last week Morrisons surprised the market by announcing a wholesale supply deal with Amazon and agreeing the outline of a new deal with online grocer Ocado to grow Morrisons.com.

There are signs 2016 could be a better year for Britain's big supermarkets who have been hammered by a price war and lost ground to German discounters Aldi and Lidl.

The "big four", headed by market leader Tesco (Xetra: 852647 - news) , are narrowing the price gap with the discounters, improving product availability and customer service and doing a better job at highlighting their larger product ranges and online services.

Shares in Morrisons have risen 41 percent over the last three months, buoyed by improving trading and the Amazon deal. Last week the company re-entered Britain's FTSE 100 index of blue chip companies after a three month absence.

They slipped 2.9 percent to 196 pence by 1045 GMT.

UNDER NEW MANAGEMENT

Over the coming months hundreds of Morrisons' fresh and frozen products will be made available to Amazon's UK customers. Some analysts expect that over time the project will be extended to Morrisons' entire range.

"In terms of whether it can grow to be a bigger business, I think in the end that's down to customers and down to the execution in the broader supply chain on both sides," Chief Executive David Potts told reporters.

"Our belief is it will be advantageous to stakeholders in Morrisons," he said.

Potts, a former Tesco executive who joined Morrisions a year ago, was speaking after the firm reported an expected 27 percent slump in full-year profit.

Morrisons and bigger rivals Tesco, Sainsbury (Amsterdam: SJ6.AS - news) 's and Asda, are cutting prices to stem the loss of shoppers to the discounters.

Morrisons made an underlying pretax profit before one off items of 302 million pounds ($429 million) in the year to Jan. 31, at the mid-point of previous guidance but down from the 413 million pounds made in 2014-15. It (Other OTC: ITGL - news) represents a fourth straight year of decline and a nine year low.

Though turnover for the year fell 4.1 percent to 16.1 billion pounds, sales at stores open over a year showed an improving trend and were up 0.1 percent in the fourth quarter - a first quarterly rise in four years.

"We've got our tails up a bit on trade," said Potts, who also upgraded guidance on working capital, property disposal proceeds, and the dividend.

Morrisons was now more competitive and receiving positive customer feedback from moves to tailor offers to local tastes and improved store standards, he said.

"The notable improvement in sales trends towards the end of the year is a sign that the back-to-basics strategy may be starting to bear fruit," said Tristan Chapple, head of research at Phoenix Asset Management, which owns 1 percent of Morrisons. ($1 = 0.7049 pounds) (Editing by Keith Weir)