* Q2 profit drops 42 pct yr/yr
* Nokia sees recovery later in 2018
* Company counting on Q4 acceleration to meet targets
* Shares fall 8 pct (Adds comments, share reaction, background)
By Jussi Rosendahl and Eric Auchard
HELSINKI/LONDON, July 26 (Reuters) - Telecom network equipment maker Nokia posted quarterly earnings below market expectations on Thursday but vowed that business would recover later this year on the back of a next-generation 5G cycle picking up pace in the United States.
Shares in the Finnish company fell 8 percent after it said operating profit in the second quarter dropped 42 percent from a year ago to 334 million euros ($392 million), missing the analyst mean forecast of 373 million euros.
Four-fifths of its profit came from its small patent licensing division. The networks business, which makes up 88 percent of Nokia sales, had a quarterly operating profit margin of only 1.5 percent, far below the 4.0 percent market consensus.
The network equipment business, which is led by three big players - China's Huawei, Nokia and Sweden's Ericsson - has struggled with flagging growth since the current generation of 4G mobile equipment peaked in 2015.
Nokia provided few details on how much of a recovery it may see in the current third quarter following the weak first half.
However, the company reaffirmed its outlook for the full year - to deliver an operating margin of 6-9 percent in its mainstay networks business - saying it saw a pickup, especially in the fourth quarter, typically its strongest period of the year.
"The second quarter was a clear disappointment. With such a weak first half of the year, they must improve a lot to meet that full-year guidance," said Inderes analyst Mikael Rautanen with a "buy" rating on the stock.
"They will either follow up with strong results or a profit warning."
Net sales fell 1 percent from a year ago to 5.32 billion euros, excluding the impact of currency fluctations.
Nokia CEO Rajeev Suri said the company was weathering some price pressures in networks, not from competitors but from telecom operators who were funding early 5G equipment purchases out of their existing capital spending budgets.
"We believe that the cycle for 5G will begin from Q3," Suri told reporters on a conference call. "It will be stronger in Q4, especially in North America, given that the relative mix of North America will progressively increase from Q2 to Q3 to Q4,"
North America contributed 31 percent of the network unit's worldwide sales in the quarter, and most of its growth relative to other regions.
Suri said Nokia was seeking to cut more costs on top of its target of 1.2 billion euros of annual cost savings, a plan launched after a 15.6 billion euro acquisition of Franco-American rival Alcatel-Lucent in 2016.
Shares in the company were down 8.3 percent on the day in Helsinki by 0732 GMT but remain up 19 percent in the year to date as investors' hopes rise for a new network spending cycle to begin, driven by demand for new 5G networks. ($1 = 0.8528 euros) (Reporting by Jussi Rosendahl and Eric Auchard; Editing by Adrian Croft)