Switzerland's UBS will slash jobs and review the future of its fixed income business after the underperforming unit hit second-quarter profits and forced it to push back targets.

The bank said on Tuesday it would cut costs by 1.5 billion to 2.0 billion Swiss francs ($1.9 billion - $2.5 billion) in the next two to three years and would likely book significant restructuring charges later this year.

The new capital and regulatory environment will weigh on banking profits and we cannot rely on markets to boost our profits when global economic growth looks to have stalled, Chief Executive Oswald Gruebel told a results presentation.

Net profit fell 49 percent to 1.0 billion Swiss francs, undershooting average estimates for 1.23 billion francs as revenues were hit by the strong franc and slow trading in fixed income, currencies and commodities (FICC).

UBS invested heavily in fixed income to capitalize on the sector's boom in the wake of the financial crisis. But the bank's hiring drive, which included hiking fixed salaries to compensate for lower post-crisis bonuses, left it with an inflexible cost base as trading has sagged.

Gruebel -- himself a former bond trader -- said the time had come to consider what kind of fixed income department UBS needed to serve the rest of the bank, focused on serving rich clients.

The big question is what size of trading operation do you need to support wealth management and asset management, he said, adding he thought at least half the business was critical.

Some analysts say UBS, which has lost a series of high-profile bankers to rivals this year, will have to scale back or even scrap its FICC business.

Bad figures from UBS and we expect that the investment bank, especially the FICC business, will bear the brunt initially, but cost cuts are likely to come across the organization, said Helvea analyst Peter Thorne.

Switzerland's biggest bank, which had to be rescued by the state in 2008 after massive losses on toxic assets, slashed staff to around 64,000 from around 78,000 before the financial crisis, but it grew again in the last year to over 65,700.

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Gruebel said the target he set in 2009 for a pre-tax profit of 15 billion francs in three to five years was unlikely to be achieved in the original timeframe and said he would give more details on this and restructuring at a November investor day.

Many analysts had already said Gruebel, brought out of retirement in 2009 to turn UBS around after it almost collapsed in the financial crisis, would have to abandon the target.

UBS will cut costs across all divisions, although it was too early to say how many jobs would go, Chief Financial Officer Tom Naratil said, adding the bank would continue to invest in growth areas and would not cut client advisers in its core wealth management unit.

Gruebel said the bank -- which appointed former Bundesbank chief Axel Weber future chairman earlier this month -- still needed his experience. As soon as we find somebody better than me, I will finally retire, he said.

Shares in UBS fell 1.3 percent by 1233 GMT, compared to a 0.2 percent dip for the wider European banking sector <.SX7P>.

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UBS said its results would continue to suffer as it did not expect market conditions to improve much in the third quarter, particularly given a traditional summer decline in activity.

It said it might recognize deferred tax assets that could cut its full-year effective tax rate although a British levy on bank liabilities could hit the investment bank's performance before tax by about 100 million francs this year.

Goldman Sachs last week reported a big drop in income from FICC on weak client activity and lower risk taking.

UBS and cross-town rival Credit Suisse face the added burden of high cost bases in Switzerland as the safe-haven franc soars to new record highs against the dollar and euro.

Credit Suisse could also announce cost cuts along with its quarterly results on Thursday, with the Neue Zuercher Zeitung reporting on Tuesday that 1,500 to 2,000 jobs could go.

UBS said its wealth management and retail and corporate businesses improved profitability despite increased risk aversion and lower client activity but inflows still disappointed, with group net new money of 8.7 billion francs.

However, inflows were slightly better at its wealth management Americas unit at 2.6 billion francs, compared to average analyst forecasts for 2.1 billion.

Both Gruebel and Naratil said the Americas business was not up for sale, despite market rumours to the contrary.

(Additional reporting by Martin de Sa'Pinto; Editing by Sophie Walker)

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