TUI looks to new holiday destinations as Turkey bookings slump

* Turkey especially popular with German tourists

* Shifts capacity to Spain and Greece

* Invests in Cape Verde, Bulgaria to offer alternatives

* TUI (Other OTC: TUIFF - news) underlying loss narrows in Q1

* Shares (Berlin: DI6.BE - news) drop more than 3 percent (Recasts with comments on alternative destinations)

HANOVER, Germany, Feb 9 (Reuters) - TUI Group, the world's largest tour operator, reported a 40 percent drop in bookings to Turkey this summer due to safety concerns and said it was investing in Cape Verde and Bulgaria as alternatives to security-threatened North Africa.

Turkey is especially popular with German tourists, but has seen demand slump after a suicide bomber killed 10 Germans in a busy Istanbul square in January. Russians have been told to stay away by Moscow following the shooting down of a military jet last year.

Turkey has since offered jet fuel subsidies in a bid to stimulate tourism demand.

TUI Chief Executive Fritz Joussen said that around 14 percent of its customers had travelled to Turkey last summer but it expects to send only 1 million tourists there this year, compared with just under 2 million in a usual year.

In addition, the Zika outbreak in the Americas is also troubling the travel industry, although Joussen said demand for the Caribbean was booming and that he expected only a small hit.

TUI has already seen a sharp fall in holidays to Tunisia and Egypt this winter.

But tourists shifting to Spain, in particular the Canary Islands, and Greece, prompted TUI to confirm its forecast for underlying earnings to rise by at least 10 percent on a constant currency basis.

"The Canaries is pretty much booked out," said Joussen, who is now sole chief executive after co-CEO Peter Long stepped down at Tuesday's annual general meeting.

Hotel unit Riu was able to increase prices by 13 percent in the first quarter of the current financial year, mainly since the increased demand in the Canaries meant it did not have to offer discounts on last-minute bookings.

But with a package holiday in a five-star hotel in Tunisia costing about the same as for a two-star hotel in the Canaries, TUI is looking for new destinations. Joussen said Bulgaria was comparable to Tunisia price-wise, while the group was also building hotels in Cape Verde.

"We are creating alternatives, but in the long term we believe demand will come back," Joussen said, adding that he expected demand for Turkey to recover quickly.

TUI reported a first-quarter underlying loss before interest, tax and amortisation (EBITA) of 101.7 million euros ($114 million), against a loss of 104.8 million one year ago. Travel companies typically report a loss in the first quarter.

It also took a 42 million euro hit from a writedown of its stake in shipper Hapag-Lloyd after a drop in its share price.

Its shares dropped 3 percent after Barclays (LSE: BARC.L - news) cut its earnings per share target.

($1 = 0.8923 euros) (Reporting by Victoria Bryan; Editing by Maria Sheahan and Louise Heavens)