FRANKFURT (Reuters) - Deutsche Bank <DBKGn. DE> posted a 98 percent drop in quarterly pre-tax profit to 18 million euros ($24.81 million), below the lowest expectations, weighed by a fall in trading income and a 1.2 billion euros increase in litigation provisions.

The whopping legal charges come after rivals like J. P. Morgan <JPM. N> and Rabobank set aside billions of dollars to deal with scandals revealed following the financial crisis.

Deutsche's litigation reserves, its war chest to deal with anticipated legal difficulties, rose to 4.1 billion euros in the third quarter, the bank said in a statement on Tuesday.

Deutsche was expected to post a 43 percent drop in pre-tax profit to 642 million euros, according to a Reuters poll of nine analysts. The bank's trading contribution to that was expected to fall 47 percent to just over 1 billion euros.

"We expect the litigation environment to continue to be challenging," the bank said in a statement, signaling that the worst may not be over.

Unlike rivals Barclays and UBS, Deutsche Bank has not yet reached a settlement over allegations it was involved in a scam to manipulate global benchmark inter-bank lending rates.

Deutsche said a probe into the bank's activities have the potential to result in significant financial penalties and other consequences for the bank.

More than a dozen banks and brokerage firms, including JP Morgan <JPM. N> and Citigroup <C. N>, are under investigation by regulators over the possible manipulation of benchmark rates -- including the London interbank offered rate, known as Libor -- which are used to price trillions of dollars' worth of loans.

Revenue from Deutsche's profit engine, sales and trading of debt, fell by 48 percent to 1.2 billion euros, compared with the year-ago period.

Weaker trading income has already hit rivals like Credit Suisse <CSGN. VX> and Goldman Sachs <GS. N> this quarter after the Federal Reserve wrong-footed markets with a decision to continue its bond buying stimulus instead of starting to wind it down. ($1 = 0.7254 euros)

(Reporting By Thomas Atkins and Edward Taylor and Arno Schuetze; Editing by David Cowell)


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