Finland's Kone posts strong profit, sees risks in Chinese market

* Says Q4 EBIT up more than expected

* Lifts annual dividend

* Sees China market falling in 2016

* Shares rise 2 pct (Adds analyst comment, background on China)

HELSINKI, Jan 28 (Reuters) - Finland's Kone, the world's second-largest elevator maker after Otis, reported strong quarterly profit and orders, and proposed a larger dividend but said demand could drop this year in its key market China.

Kone said its operating profit in the fourth quarter increased 20 percent from a year ago to 378.5 million euros ($413 million) as sales growth in all regions was boosted by favourable foreign exchange rates.

Analysts on average had expected a profit of 361 million euros.

Kone's expansion in China has driven its profit growth in the past years, but the market's demand for elevators turned down last year and could fall further this year, the company said. China contributes about 35 percent of Kone's sales.

"In China, we expect the market to be challenging. The new equipment market in China, when measured in units, is expected to decline by 5-10 percent (in 2016) and to continue to see intense price pressure," CEO Henrik Ehrnrooth said.

The company expects group sales to grow by 2-6 percent this year at comparable exchange rates. Full-year operating profit is expected to be in the range of 1,220-1,320 million euros, compared to 1,241 million euros in 2015.

Analysts said the comments on China were surprisingly gloomy.

"If the decline in new equipment sales is closer to 10 percent, combined with a drop in prices, then the value of the Chinese market could decline almost 15 percent", said Pekka Spolander, analyst at OP Financial Group.

However, shares in the company were up 2.4 percent by 1149 GMT as Kone also proposed a annual dividend of 1.40 euros per share, roughly in line with expectations and up from a previous 1.20 euros. Also, new orders in the quarter beat expectations.

($1 = 0.9172 euros) (Reporting by Jussi Rosendahl and Tuomas Forsell)