By Arno Schuetze and Jonathan Gould

FRANKFURT (Reuters) - Deutsche Bank <DBKGn.DE> warned it may need deeper cost cuts to turn itself around, after revenue fell sharply in the second quarter due to challenging markets and low interest rates.

"If the current weak economic environment persists, we will need to be yet more ambitious in the timing and intensity of our restructuring," Chief Executive John Cryan said on Wednesday. "We will not deviate from tough decisions just to flatter earnings in the short term."

Cryan, who took the helm a year ago, has launched a deep overhaul of the bank, slashing jobs, revamping information technology and shrinking non-core assets.

But in contrast to some European peers, Deutsche is sticking with its strategic focus on investment banking, where its global reach has earned it the International Monetary Fund's label of being the riskiest of all banks.

Deutsche's cash-cow bond trading business slid by a fifth in the second quarter, contrasting with the performance of some U.S. heavyweights who benefited from a more robust home market. Deutsche said it expected revenue to pick up in the second half.

Shares in Germany's largest lender fell 4.5 percent by 1050 GMT, making them the biggest decliner in Germany's DAX index <.GDAXI> of blue chip companies.

Cryan said Deutsche was making progress on restructuring but investors and analysts said they had expected greater focus on cost cutting given falling revenue in several business areas.

"On cost cuts, Cryan only paid lip service today; he made no concrete announcements," a top-ten investor said.

JP Morgan analysts wrote in a note: "We are disappointed that Deutsche Bank is not adjusting its cost target ... considering the lower revenue environment."

Quarterly net profit dropped to 20 million euros ($22 million) from 798 million a year earlier, but was ahead of forecasts for a 105 million loss, while group revenue slid 20 percent.

Deutsche's efforts to restructure and boost profit have been dogged by billions of euros in costs for litigation, settlements and fines for problems dating to before the financial crisis.


In the quarter, litigation expenses fell to 120 million euros from 1.2 billion a year earlier, offsetting a rise in restructuring and severance costs.

But new hits are due shortly and 2016 net profit will largely depend on the cost of the legal bill, Chief Financial Officer Marcus Schenck said, adding that the bank aims to bring an end to its four largest litigation cases this year.

These would include settling U.S. investigations into mis-selling of mortgage-backed securities, and ending a case involving alleged manipulation of foreign exchange rates, where the bank reached a settlement in Europe, but where negotiations with four U.S. regulators are ongoing.

It also hopes to put behind it a probe by European and U.S. regulators into suspicious equities trades in Russia, as well as remaining investigations by the Office of Foreign Assets Control on alleged money laundering, already partly settled.

While progress on settling litigation is seen as crucial in coming months, investors' near-term focus will be on how Deutsche will fare in a European health check of banks, results of which are due on Friday.

Barclays analysts have calculated Deutsche's capital gap is about 7 billion euros and point out that the gap becomes harder to fill as economic conditions deteriorate.

"But the immediate risk around the stress test is that the capital market's perception of the group - a distressed equity and credit valuation - is enough to warrant some form of intervention," Barclays wrote in a note to clients.

A second Deutsche Bank investor said: "Deutsche Bank clearly has a capital problem."

The lender's share price has fallen by nearly half since the start of the year, testing investors' faith. But in a sign of confidence, the royal family of Qatar recently boosted its stake to almost 10 percent, making it the lender's biggest shareholder.

Deutsche Bank is one of the first large European banks to report second-quarter earnings, with Credit Suisse, UBS, BNP and Barclays set to follow later this week. U.S. peers have largely reported a slide in earnings on low interest rates, which hamper their ability to profit from lending..

Spain's Santander <SAN.MC> on Wednesday reported a 50 percent drop in quarterly net profit, hit by one-off charges.

(Additional reporting by Kathrin Jones; Editing by Maria Sheahan and David Holmes)