By Harro ten Wolde

AMSTERDAM (Reuters) - Dutch chemical group Akzo Nobel reported a less-than-expected 2 percent drop in first-quarter core profit on Wednesday, but warned U.S. market conditions in decorative paints remained soft, hitting its shares 3 percent.

Akzo said the year began well but adverse weather conditions in Europe and eastern Canada at the end of the quarter resulted in a delay in market demand.

"In the United States, the trading environment continued to be soft," the world's biggest paint company said in a statement.

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Petercam analyst Jan van den Bossche said: "Indeed, it should be clear by now that the U.S. market will continue to decline in 2008," adding he expected market conditions in continental Europe to worsen.

Akzo Nobel <AKZO.AS> shares were down 1.5 percent to 52.16 euros by 4:07 a.m. EDT (0807 GMT) after hitting 51.54 euros, underperforming a 0.6 percent higher DJ Stoxx European chemical index <.SX4P>.

Akzo said its decorative paints unit, which sells brands such as Dulux, Sikkens and Flex, performed well in Asia and Latin America, with double-digit growth.

First-quarter earnings before interest and taxes (EBIT), excluding one-offs and fair-value adjustments for the ICI acquisition, were 285 million euros ($441.4 million), as it felt the impact of higher raw material prices and a weak U.S. dollar.

Average analyst expectations in a Reuters survey saw a drop to 264 million euros, with estimates ranging from 198 million to 317 million.

First-quarter revenue from continuing operations was 3.51 billion euros, against analyst expectations of 3.56 billion.

Akzo Nobel said it remained confident of outgrowing its markets and at least maintaining results in line with 2007's earnings before interest, taxes, depreciation and amortization (EBITDA) of 1.87 billion euros.

It is the first time the results include Britain's Imperial Chemical Industries Plc (ICI), which Akzo bought for 8 billion pounds ($15.7 billion) in January, and the Dutch firm gives separate numbers for decorative paints.

EBITDA at Akzo's decorative paints unit rose 3 percent to 102 million euros.

First-quarter EBITDA and EBIT margins improved, benefiting from changes in product mix and a continuing focus on cost control.

"From the first-quarter reporting, it is clear strong growth from emerging markets is not enough to balance the decline in the large mature coatings markets," Van den Bossche said.

Akzo shares have dropped 8 percent since the paint maker said last month it was feeling the economic slowdown.

U.S. paint makers such as PPG Industries <PPG.N> and Sherwin-Williams <SHW.N> have also been hit by the sagging U.S. housing market and weakening global economy.

Akzo shares trade at eight times expected 2008 operating profit, according to Reuters data, compared with ratios of five and six for Sherwin-Williams and PPG Industries respectively.