Macquarie Group , Australia's top investment bank, forecast a disappointing second-half profit and gave an outlook that raised worries about its key equity business, sending its shares sliding 7 percent.

Macquarie warned in its trading update that some market conditions were weakening, creating concerns over its Australian equity capital markets business.

The bank is the No. 2 underwriter in the domestic equity market, and Australia and New Zealand contribute nearly half the revenues of its advisory and fund management business.

Macquarie, dubbed the 'Millionaire's Factory' for its generous banker pay, said second-half profit could be 10 percent higher than the first half's, excluding one-off items, putting it in line with consensus forecasts of A$1.07 billion ($926 million) for the year to end-March.

Investors, however, were disappointed as Macquarie attached

disclaimers to those projections.

People were trading a bigger number and they didn't get it, said Donald Williams, fund manager at Platypus Asset Management. Had that number excluded the amount of money they made from buyback of the management rights of a few of their vehicles, then it would have been fine, said Williams.

Macquarie shares saw their biggest intraday fall in more than eight months, dropping as much as 7.3 percent. They closed down 6.1 percent at A$47.28, the lowest close since December 22.

Trading volume in the stock was heavy, with over 4.6 million shares changing hands, two and half times the average daily volume over the past 90 days.

It was the bank's biggest one-day fall since Australia ended a short-selling ban on financials that was put in place after the upheaval during the global financial crisis.

But Macquarie shares had risen 3 percent over the past month, outperforming an 8 percent slide in the broader market <.AXJO>.

Macquarie's muted quarterly trading update comes amid profit upgrades by financial sector peers such as AXA Asia Pacific Holdings and No.2 lender Commonwealth Bank of Australia (CBA) as Australia's economy rebounds from a slowdown.

CBA is set to report its highest half yearly profit growth in a decade on Wednesday.

The reality of earnings is going to come back to haunt the market. All the global investment banks have been belted, and this (Macquarie) has outperformed in recent weeks, so it's coming back to the pack, said George Kanaan, UBS Research sales desk head.

M&A CHANCES SHRINKING

Macquarie, which raised $400 million through an equity offering in May and $1 billion through a bond issue last month, reported excess capital of about A$4.5 billion. But it gave no update on its plans for the excess capital, merely reiterating its need for a strong balance sheet.

It was cautious about market conditions.

Economic conditions continue to trend back to normal but strong market conditions experienced in the first half have moderated in certain areas including Australian equity capital markets and credit businesses, CEO Nicholas Moore said in a statement.

Macquarie, which has used the global financial crisis to buy four North American businesses for about A$1 billion, also said acquisition opportunities are likely to shrink going forward.

Moore declined to comment on market speculation of a bid for RBS Sempra, a commodities joint venture between Royal Bank of Scotland and Sempra Energy . I think with the world going back to normal, which seems to be the case at the moment, you would expect the number of acquisitions to be trending back toward normal, he told an analysts' briefing.

Macquarie, which is raising its focus on advisory, trading and funds management, said assets under management rose to $A342 billion from A$216 billion in September primarily helped by the acquisition of Delaware investments.

Top lender National Australia Bank , third-ranked Westpac Banking Corp and fourth-largest Australia and New Zealand Banking Corp announce quarterly updates later this month.

($1=1.156 Australian Dollar)

(Editing by Mark Bendeich, Muralikumar Anantharaman and Ian Geoghegan)

Australia Investment Westpac