* 2016 core earnings 1.75 bln euros, in line with forecast
* Sees fuel bill rising by 350 mln euros in 2017
* Aims to reduce costs by another 2.5 pct in 2017
* Shares jump, top gainer on the DAX index. (Recasts, adds further comments on pilots)
By Victoria Bryan and Peter Maushagen
MUNICH, March 16 (Reuters) - Lufthansa announced a higher than expected 2017 profit target on Thursday, saying a rebound in demand in the United States and Asia and a breakthrough pay deal with pilots had improved its prospects.
The German airline said it expected adjusted earnings before interest and tax (EBIT) to fall only slightly from 1.75 billion euros in 2016 whereas analysts had predicted a slump in underlying profits this year to 1.38 billion euros.
Lufthansa's shares jumped nearly 6 percent to trade above 15 euros for the first time in a year and were 4.4 percent higher at 1213 GMT, thanks to the profit target and the pay deal ending months of strikes by pilots struck a day earlier.
Like its rivals, Lufthansa's ticket prices came under pressure in Europe and elsewhere last year from overcapacity and fierce competition from airlines with a lower cost base.
The carrier said it still expected ticket revenues to fall this year, but not by as much as the 6 percent drop in 2016, and that its fuel bill would rise by about 350 million euros to 5.2 billion euros.
But it said trading had been good in the first few months of 2017 thanks to a rebound in U.S. and Asia demand and that its cost base would improve thanks to the deal with its pilots, even though it would only have a positive impact on underlying profit from next year.
"We saw an encouraging trading environment in January and February and ... the year started with a real breakthrough on the labour side," Chief Executive Carsten Spohr said.
Wednesday's deal on pay and pensions with pilots is expected to reduce annual pilot costs by about 15 percent, or some 150 million euros, Spohr said.
Under the deal, productivity will increase as pilots will fly more hours and there will be a new structure for taking leave days, while the average retirement age will rise from 56 years to 60, cutting pension costs.
"It's a real success. The pilots made major concessions, which I did not think would happen," Union Investment fund manager Michael Gierse said.
Chief Financial Officer Ulrik Svensson said revenues were still under pressure in Europe. The Lufthansa group is growing strongly on European short-haul routes this year thanks to its takeover of Brussels Airlines and a deal to lease 38 planes and crew from Germany's Air Berlin.
Lufthansa reduced unit costs by 2.5 percent last year, not including fuel or the impact of currency fluctuations, and is targeting a similar reduction this year.
Spohr also said Lufthansa was in talks with Fraport about lowering fees after the Frankfurt airport operator signed up Ryanair with big discounts. ($1 = 0.9315 euros) (Editing by Greg Mahlich and David Clarke)