UPDATE 2-UK supermarket Morrisons raises profit outlook

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

* First quarterly rise in underlying sales in 4 years

* Sees opportunity for 50-100 mln pounds of extra profit

* Deal with Amazon struck last week

* Shares up 41 pct over last 3 months (Recasts with CEO, investor comment, shares)

By James Davey

LONDON, March 10 (Reuters) - Morrisons, the smallestof Britain's four main supermarket groups, raised its profitoutlook on Thursday after identifying ways to broaden itsbusiness 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) ofadditional profit in the medium term from areas such as onlinebusiness, wholesale, manufacturing and lower interest costs.

Last week Morrisons surprised the market by announcing awholesale supply deal with Amazon and agreeing the outline of anew deal with online grocer Ocado to growMorrisons.com.

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

The "big four", headed by market leader Tesco, arenarrowing the price gap with the discounters, improving productavailability and customer service and doing a better job athighlighting their larger product ranges and online services.

Shares in Morrisons have risen 41 percent over the lastthree months, buoyed by improving trading and the Amazon deal.Last week the company re-entered Britain's FTSE 100 index ofblue 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 andfrozen products will be made available to Amazon's UK customers.Some analysts expect that over time the project will be extendedto Morrisons' entire range.

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

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

Potts, a former Tesco executive who joinedMorrisions a year ago, was speaking after the firm reported anexpected 27 percent slump in full-year profit.

Morrisons and bigger rivals Tesco, Sainsbury's andAsda, are cutting prices to stem the loss of shoppers tothe discounters.

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

Though turnover for the year fell 4.1 percent to 16.1billion pounds, sales at stores open over a year showed animproving 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, whoalso upgraded guidance on working capital, property disposalproceeds, and the dividend.

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

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