By Lisa Baertlein and Martinne Geller

Aug 6 (Reuters) - Tyson Foods Inc reported weaker-than-expected quarterly sales and earnings and lowered its full-year outlook as higher meat prices dented U.S. demand, and its shares fell 4.5 percent.

The nation's largest meat company predicted further price increases, as the worst drought in more than a half-century pushes up prices for feed corn, but said its chicken business would remain profitable next year.

Tyson's beef and pork segments have been experiencing "very difficult market conditions" that will result in lower-than-expected 2012 profit, Chief Executive Donnie Smith said, adding that rising grain costs would hurt earnings next year.

"While we ultimately expect to pass along rising input costs, these costs, coupled with continued soft demand, are likely to pressure earnings in 2013," Smith said.

J.P. Morgan analyst Ken Goldman called the comments about Tyson's chicken business -- which produces more operating income than other units -- a "significant upside surprise" to his expectations.

"We think Tyson's optimism here should be interpreted as the most important part of the release, and a positive for the stock," Goldman said in a research note. He has a neutral rating on the shares.

Tyson said its beef segment should remain profitable, but margins could be below the typical range. Margins in the pork segment should be at or above the normal range, while prepared foods' margins should be in the normal range, it said.

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The U.S. drought is making meat more expensive and will test demand for chicken, beef, pork and possibly even turkey as consumer prices are expected to climb, executives said.

Sales of beef and pork through grocery stores and other retail outlets were down in the latest quarter, while chicken sales were flat.

Sales of chicken at restaurants, cafeterias and other food service customers held up during the summer, boosted somewhat by fast-food restaurants featuring chicken on the menu. Beef demand was softer, but was better than pork, they said.

U.S. shoppers have remained frugal in a still-recovering economy. Also, domestic demand for ground beef took a hit in the spring following a controversy over a filler product critics called "pink slime."

Shoppers appear to be buying less expensive cuts within meat categories, rather than trading down from beef to chicken or other segments, Tyson officials said.

While retailers and restaurants are trying to avoid raising prices, Tyson executives said increases are virtually inevitable because producers will cut meat supplies if they are not making profitable sales.

"Supplies at some point in time are going to contract because the commodity producer has to have a viable business," Chief Operating Officer Jim Lochner said.

"You're going to see increased prices," he said.

PROFIT TUMBLES

Tyson said net profit tumbled to $76 million, or 21 cents per share, for the fiscal third quarter ended June 30, from $196 million, or 51 cents per share, a year earlier.

Excluding a $167 million charge for the early extinguishment of debt, earnings were 50 cents per share. On that basis, analysts on average were expecting 54 cents, according to Thomson Reuters I/B/E/S.

Sales rose to $8.31 billion from $8.25 billion a year earlier. Analysts were expecting $8.72 billion.

The company said it now expects 2012 sales of $33 billion, $1 billion less than its previous estimate. It expects 2013 sales of $35 billion due to price increases related to a likely decline in the U.S. meat supply and higher raw material costs.

Analysts were expecting sales of $34.02 billion for 2012 and $35.40 billion for 2013.

The company also lowered its forecast for capital spending this year, saying its ongoing projects will not be completed.

After buying 3.9 million company shares in the third quarter, executives said they would reduce share repurchases until they have better visibility into Tyson's working capital needs.

Tyson shares fell 85 cents to $14.55 in midday trading on the New York Stock Exchange.