By Mantik Kusjanto

FRANKFURT (Reuters) - Germany's Celesio (CLSGn.DE: Quote, Profile, Research) bore the brunt of price cuts at its Lloyds Pharmacy chain in Britain with a 39 percent drop in first-quarter pretax profit, more than expected, pulling its shares down by up to 8 percent.

Europe's biggest drug distributor warned last month of lower earnings in the first half after sharp cuts in reimbursement prices for generic drugs in Britain started in October. But the magnitude of the fall still surprised analysts.

"As expected the first quarter has been a disaster," said Martin Possienke, an analyst at Equinet. "We will most likely have to cut our forecasts again."

Shares in Celesio were down 6.3 percent at 25.35 euros at 1130 GMT, after hitting a low of 24.87 euros -- the lowest level since August 2004. The German mid-cap index was flat.

Pretax profit in the first-quarter fell to 89 million euros ($138 million), pressured also by the weak pound and discount wars in the German drug distribution market.

A Reuters poll of 11 analysts had forecast, on average, earnings before tax of 112 million euros.

Celesio -- controlled by German conglomerate Haniel, which also controls German retailer Metro (MEOG.DE: Quote, Profile, Research) -- generated about half of group profit in Britain where its Lloyds Pharmacy chain competes with Alliance Boots.

The company reaffirmed on Tuesday the second half should show relative improvement, with Lloyds expected to partially offset the impact from government intervention.