High levels of loan defaults in the rocky economies of Spain and Brazil, two key markets for Santander , will be in focus when the euro zone's biggest bank reports results on Thursday.

Investors expect further write downs on bad property investments in Spain after the bank absorbed around 70 percent of government-enforced losses in the first half, hurting profits.

Santander will report a halving of net profit to 2.5 billion euros (2 billion pounds) for the 9-month period, largely due to recognition of real estate losses following Spain's 2008 housing and construction crash, a Reuters poll forecast.

Broker Keefe, Bruyette and Woods (KBW) expects the bank to write off 2.2 billion euros of pending real estate losses in the second half.

Rising bad loans in Spain have spread beyond the real estate sector as more Spaniards default on their debts in a crippling recession with a quarter of the workforce out of a job.

Bad loans in the euro zone's fourth largest economy hit record highs in August.

Spain accounts for just 14 percent of profit at Santander, but the bank has been tarnished by its home country's woes as investors fret about the future of a banking sector about to receive up to 100 billion euros in aid from Europe.

Santander passed a September independent audit of the sector with flying colours and a massive capital surplus, and will not receive funds from the bailout.

Shares have risen around 8 percent in the year to date, underperforming European peers up 15 percent in the same period. <.SX7P>

"Short-term, the stock's performance continues to be driven by investors' sentiment towards the sovereign," said Antonio Ramirez at KBW.

Brazil, which accounts for over a quarter of profit at Santander, has rolled out more than a dozen stimulus measures since a sharp slowdown in late 2011 in an attempt to accelerate a sluggish recovery.

Brazil and Spain pushed up the percentage of loans in arrears as a percentage of total loans at the bank in the second half. Nomura said it preferred Santander's domestic rival BBVA, given its greater exposure to Mexico's economy.

"Given the continued economic slowdown in Brazil and deteriorating asset quality, we see greater relative earnings risks for Santander relative to BBVA," the bank said in a note.

Investors will also quiz the bank on whether its withdrawal from a 1.65 billion pound deal to buy 316 UK branches from Royal Bank of Scotland earlier this month will affect plans to list its UK unit.

Santander listed its Mexican business in a $4.1 billion market debut in September.

(Editing by David Cowell)