MADRID (Reuters) - A buoyant performance from its British business helped Spanish bank Santander (>> Banco Santander, S.A.) to increase second-quarter revenues, offsetting a weaker home market and driving an 18 percent rise in recurring net profit from a year earlier.

The stronger growth points to progress in Chairwoman Ana Botin's plan to improve profits by expanding lending rather than through acquisitions, as the bank tries to ride an economic recovery in Europe.

In Britain -- now the group's biggest profit engine ahead of Brazil -- lending rose nearly 3 percent from the end of April to June when measured in euros. Net interest income, a measure of earnings on loans minus deposit costs, grew more than 4 percent quarter-on-quarter.

The UK arm's results also benefited from a strong pound and a recent restructuring to focus more on commercial loans. A listing of this unit is still on the back-burner, however, and Santander said on Thursday the long-mooted spin-off would not happen within the next two years.

Like many peers, Santander is focussing on adapting to new regulatory demands aimed at making banks more resilient in a crisis, while trying to improve profitability at the same time.

Chief Executive Jose Antonio Alvarez said the group would invest 1 billion euros (£700 million) over the next three years to satisfy requirements from global regulators, including in Britain, where banks have to shield their retail banking business from riskier trading activities.

Botin, who took over from her late father last September, has also made it a priority to fix a U.S. division which failed a Federal Reserve health-check two years in a row.

SPAIN UNDER PRESSURE

Profits in most core countries Santander operates in rose from a year ago and quarter-on-quarter, including in Spain, which contributes 16 percent to net income and which was helped by falling charges against soured debts as the economy recovers.

But some analysts highlighted that profits across the group would have to grow at a faster rate in the second half of the year to reach market expectations, at a time when revenues in Spain are under pressure and Brazilian earnings are being hurt by a fall in the local currency.

Santander is currently seen posting a 7.5 billion-euro profit in 2015, according to a Thomson Reuters poll of 29 brokerages. Its recurring net profit stood at less than half of that at 3.4 billion euros in the first six months of 2015, slightly below forecasts.

However, that did not reflect 835 million euros of gains in Brazil, where Santander reversed charges it had taken in relation to a tax dispute, after a favourable court ruling. Including that gain, first-half net profit was 4.26 billion euros.

Santander shares were down 2.7 percent at 1320 GMT, underperforming European banking stocks <.SX7P>.

Santander is facing a squeeze on margins from fierce competition to lend to small businesses in Spain which could also affect domestic rivals BBVA (>> Banco Bilbao Vizcaya Argentaria S.A.), Caixabank (>> CaixaBank SA) and Popular (>> Banco Popular Espanol SA), all due to report results on Friday.

Santander's net interest income in Spain shrank quarter-on-quarter, and the trend may continue, the bank said.

"I'm not optimistic about this for the time being," Alvarez told analysts on a conference call.

He later said at a news conference the bank may struggle to increase lending in Spain at its target rate of between 3 and 4 percent for this year.

Santander's lending in the country grew only 0.2 percent in the second quarter from the first, as households and companies shy away from taking on fresh debt following a deep downturn.

"It's going to be tough, we will grow (credit) a little, it's still not growing at the rhythm we thought it would," Alvarez said.

(Additional reporting by Steve Slater in London; Editing by Julien Toyer, Jane Merriman and Mark Potter)

By Sarah White and Jesús Aguado