Chief Executive Antony Jenkins, under pressure to lift profitability and stamp out wrongdoing, said on Wednesday a challenging operating environment and the legacy of past misconduct continued to dog the bank.

But he said he was ahead of target in cutting costs and hiving off assets that Barclays no longer wants.

Barclays has been in the crosshairs of regulators determined to stamp out the culture of irresponsible risk taking and greed blamed for bringing global finance to its knees in 2008-9.

The bank avoided a state bailout during the crisis by turning to Middle Eastern investors to bolster its capital. It was the first bank to be fined for attempted manipulation of Libor benchmark interest rates.

"We can now see the new Barclays starting to emerge," Jenkins told analysts.

Barclays has stopped most of its physical commodities trading and axed many emerging markets and interest-rate trading products, among other reforms.

It said it had cut 5,000 jobs this year, leaving it with fewer staff than at any time since 2007. It aims to cut a total of 14,000 positions in 2014, including 2,500 in investment banking.

Barclays shares were up 4.4 percent at 227.9 pence by 1100 GMT, the top performing European bank stock.

"Investment banking revenues were better than feared, the balance sheet is strengthening and the non-core run-off is progressing well," said Mike Trippitt, an analyst at Numis, who rates the stock a 'buy'.

Barclays said the U.S. Department of Justice had requested an extension to a non-prosecution agreement (NPA) that was due to expire last month, to allow it to continue to investigate possible misconduct in foreign exchange trading. The NPA was put in place after the bank was fined $450 million for the alleged rigging of Libor interest rates, and means if the DOJ finds any wrongdoing in FX activities it could come down harder on the bank.

The bank also set aside a further 900 million pounds to compensate customers mis-sold loan insurance, taking its bill for the scandal to 4.85 billion. It said the rise was mainly due to a significant increase in claims dating back to before 2005, driven by claims management companies.

Jenkins said the bank would accept sanctions when it is shown to be in the wrong, but said where its actions "are mischaracterised or we are wrongly accused we will defend ourselves robustly."

That was a reference to a lawsuit filed last month by New York's attorney general alleging the bank lied to clients and its electronic trading platform - or so-called "dark pool" - gave an unfair advantage to high speed traders.

Barclays last week said the lawsuit should be thrown out as the complaint did not identify any fraud and took marketing material out of context.

WEAK INVESTMENT BANK

Barclays reported adjusted profits in the three months to the end of June fell to 1.7 billion pounds from 1.8 billion a year ago. First-half earnings were 3.3 billion, down 7 percent on the year but above the average forecast of 3 billion from analysts polled by the company.

The bank's shares are down 19 percent this year, the third worst performer among Europe's top 47 banks <.SX7P>, which are on average up 1 percent. Barclays shares trade at 0.6 times book value, well below the average of 1 times for its European peers, according to Reuters data.

Its valuation is being depressed by the threat of more litigation costs, weak returns and its still hefty reliance on the investment bank, which is seen as more volatile than retail and corporate banking.

Revenues fell 16 percent at the investment bank, where business has been hit by a decline in fixed-income trading and tougher regulation and the impact of the strong British pound.

Revenue from credit and macro products in the second quarter was down 17 percent, a steeper drop than at U.S. rivals, but advisory revenues jumped 35 percent, outperforming peers.

The bank said its return on equity (RoE) was 6.5 percent in the first half of the year, down from 7.8 percent a year ago and well below Jenkins' target of 11 percent.

It said RoE in the core business was 11 percent and the "drag" from the run-down of non-core assets had reduced and it was running down those assets faster than expected.

It set up a "bad bank" two months ago to house assets it does not want - including its retail banking operations in Italy, France, Spain and Portugal - and it said the unit had shed 85 billion pounds of assets to leave 315 billion.

The bank reported a stronger-than-expected leverage ratio of 3.4 percent, up from 3 percent at the start of the year, and said it was on track to get that above 4 percent by 2016.

($1 = 0.5902 British pounds)

(Editing by Tom Pfeiffer)

By Steve Slater and Matt Scuffham