* Q3 underlying EBIT NOK 659 mln vs 306 mln seen by analysts
* Lower costs, physical delivery premiums drive earnings
* Sees demand outside China up 2% in 2013 vs earlier 2-4%
* Shares surge 7 pct to 10-month high (Adds quotes by CEO, analysts, share)
By Henrik Stolen and Terje Solsvik
OSLO, Oct 23 (Reuters) - Aluminium producer Norsk Hydro posted a bigger-than-expected jump in quarterly earnings thanks largely to cost cuts and high premiums on physical deliveries of the metal, lifting its shares as much as 7 percent on Wednesday.
Benchmark aluminium prices have fallen in recent years as the global economic downturn has hit industries from automakers to builders.
Norsk Hydro has responded with a plan to cut costs by $300 a tonne. Chief Executive Svein Richard Brandtzaeg said this would be completed for the aluminium smelters it fully owns by the end of 2013.
The company also benefited from the high premiums over the benchmark price that industrial consumers must pay to get their hands on physical metal.
Large volumes of aluminium have been locked up in warehouses, creating a shortage in the market while the underlying supply exceeds industrial demand.
Some analysts cited low prices and continuing poor fundamentals in the aluminium market and sounded a note of caution as to whether the firm can maintain its good performance in coming quarters.
Norsk Hydro repeated its view that world aluminium demand has been recovering this year but cut its estimate for demand growth outside of China to 2 percent from a previous figure of 2 to 4 percent.
"Demand has improved and is now back at pre-crisis levels," Chief Executive Svein Richard Brandtzaeg told a news conference.
Underlying operating profit rose to 659 million crowns ($111.8 million) for the third quarter from 16 million a year ago, beating expectations for 306 million on average in a Reuters poll.
Norsk Hydro's primary aluminium unit earned 337 million crowns in the quarter, up from a loss of 4 million a year ago. Analysts had expected the division to earn 102 million.
The good performance echoed that of rival Alcoa, which reported better-than-expected core earnings earlier this month.
Norsk Hydro shares surged as much as 7 percent to touch a 10-month high. At 1322 GMT they were up 5.19 percent, outperforming an Oslo benchmark index down 0.08 percent.
"Our estimates may be upped somewhat, although our neutral recommendation will likely stay as the aluminium price remains depressed and there is no fundamental shift in the market," said Norway's Norne Securities in a note to clients.
Benchmark aluminium prices on the London Metal Exchange have almost halved from their 2008 peak at $3,380 a tonne. Prices have recovered since August but are still down around 10 percent for the year at $1,869.
Nomura also said the quarter's strong outcome may not be entirely sustainable, because one-off items such as favourable currency effects and seasons reasons for lower costs played a part.
High spot energy prices boosted the performance of Norsk Hydro's power unit, which owns several hydropower plants and produces energy for its aluminium plants and to sell into the grid. ($1 = 5.8935 Norwegian kroner) (Writing by Gwladys Fouche; editing by Jane Baird)