Royal Mail turnaround proving expensive in tough UK market

* Sees higher full-year transformation costs

* Expects UK parcels, postal market to remain tough

* Shares (Berlin: DI6.BE - news) fall as much as 5.8 pct (Adds comments by CEO, further details, updates share price)

By Esha Vaish

May 19 (Reuters) - Britain's Royal Mail Plc (LSE: RMG.L - news) warned on Thursday it faced slightly higher than previously expected costs to modernise its operations in what it said was an extremely competitive domestic postal and parcel market.

Royal Mail's prospects hinge on its ability to cut costs and modernise operations to gain a larger share of the parcels market in light of declining letter volumes.

"It (Other OTC: ITGL - news) 's an intensely competitive time in the UK and I don't see that letting up anytime soon and I see the trends in that regards to be broadly the same this year as they were last year," Chief Executive Moya Greene told Reuters.

It has also been hurt by the loss of some business from key customer Amazon, which recently started its own delivery network. Other competitors such as UK Mail (LSE: UKM.L - news) have added extra capacity, threatening Royal Mail's dominance at home.

The 500-year-old company, whose red post boxes decorated with the Royal Crest are a feature of landscapes across the UK, forecast costs associated with the transformation of its UK business of around 160 million pounds ($233 million) for the current financial year.

It previously forecast 120 million pounds to 140 million pounds per year until 2018.

Its shares fell as much as 5.8 percent and were down 3.8 percent at 488.8 pence by 1040 GMT, underperforming London's blue chip FTSE 100 index.

Its shares have gained around 14 percent since the beginning of the year.

Analysts also pointed to uncertainties over the outcome of a review of the company by regulator Ofcom, which is looking into whether Royal Mail breached competition law, and negotiation talks over wages and its pension scheme.

Liberum analyst Gerald Khoo wrote the higher costs could drag down Royal Mail's results for the year ending March 2017.

Helped by tight cost control, Royal Mail's adjusted operating profit before transformational costs rose 5 percent to 742 million in the year ended March 27. Analysts on average had expected 727 million pounds, according to a company-compiled consensus.

Including pensions accounting and other one-off items, however, profit fell 2 percent. ($1 = 0.6861 pounds) (Reporting by Esha Vaish in Bengaluru; Editing by Anupama Dwivedi and Susan Thomas)