* H1 profit falls more sharply than some analysts expected
* H1 profit shortfall raises concerns on FY results
* Declining letters business could be further hit by Brexit
* Shares fall as much as 7.5 pct, top FTSE 100 loser (Adds CEO, analyst comments, details, share movement)
By Esha Vaish
Nov 17 (Reuters) - A fall in spending on junk mail bycompanies rattled by Britain's vote to leave the European Unionhit Royal Mail's first-half profit on Thursday, pushingit to pledge to further limit its costs and knocking its shares.
The former state-owned monopoly is battling competition fromnew entrants and former customers such as Amazon, whichhas started its own delivery system, as it seeks to moderniseand regain business in the overcrowded parcels market.
Although Royal Mail has replaced all Amazon business lost bysigning up new retailers, concerns still remain as DHL isramping up competition and its owner Deutsche Post ismuscling into the market by purchasing rival UK Mail.
Royal Mail, which was floated in 2013, needs to make moremoney from parcels to offset falls in its mail business, withhouseholds and businesses sending fewer letters.
It posted a 5 percent drop in first-half profit, with growthin its parcels business not enough to offset a 6 percentdeterioration in second-quarter letter volumes.
"We have doubts that parcels revenue can fully offset thesecular decline in letters revenue," Liberum analysts wrote,adding that Royal Mail's share price already priced in anyfuture growth.
Royal Mail's chief executive Moya Green told Reuters itsdomestic marketing mail business had seen a drop-off in activityas businesses grew cautious on their advertising spendingfollowing the Brexit vote.
Britain cut its 2017 economic growth forecast after thesurprise referendum outcome and Green said the letters businesswas very "sensitive to rates of economic growth".
Green said Royal Mail would now begin to skew more of itsspending towards winning business rather than investing intechnology to catch up with rivals as it reaches the end of athree-year transformation programme.
Royal Mail's operating profit before transformation costsfell to 320 million pounds in the half-year to Sept. 25, belowsome analysts' expectations.
Some also questioned whether it would be able to match afull-year profit consensus of 732 million pounds, with itsresults now more weighted than usual towards the second half,when trading is more volatile due to Christmas.
Royal Mail said its full-year outcome would be dependent onChristmas trading, Green declined to give any details.
"Letter weakness still needs to be offset with growth in thehighly competitive parcels arena," said Mike van Dulken, head ofresearch at Accendo Markets.
Royal Mail's shares, which floated at 330 pence, fell asmuch as 7.5 percent to 461.4 pence.
The company said it expected to avoid 600 million pounds inannualised costs over three years to March 2018, versus aprevious target of 500 million pounds, while it estimated thecosts associated with its UK transformation to be between 130million and 160 million pounds for the year to March 2017, downfrom a previous forecast of around 160 million.
Royal Mail's rival UK Mail posted lower six-month revenue,but said it was confident heading into Christmas. (Editing by Alexander Smith)