* Q3 underlying pretax profit 1.3 bln pounds, up 8.5 percent

* Barclays Capital Q3 revenue sags to 2.83 bln pounds

* 2010 bad debts to fall 30 percent to near 5.7 bln sterling

* BarCap October income in line with Q3, November better

* Shares up 2.8 percent

(Adds comments, details, updates shares)

By Steve Slater

LONDON, Nov 9 (Reuters) - Barclays sees bad debts falling by almost a third this year, a better-than-expected recovery filling a profit hole left by continued weakness in the British bank's investment banking arm.

Europe's seventh biggest bank said it has a healthy capital position and sees no need to tap investors for cash to meet tougher global rules. The outlook provided in its third quarter results helped lift its shares 2.8 percent to 293.5 pence, outweighing concerns that investment banking division Barclays Capital (BarCap) has lost momentum.

The bank said it was confident of achieving a core Tier 1 capital ratio of 11.5 percent by the end of 2013, up from 10 percent now, and above most rivals.

"BarCap revenues are a disappointment, albeit in line with managed down expectations, but the impairments are massively ahead of guidance. On capital ... it's a pretty firm rebuttal of the ongoing speculation on whether they need to raise capital," said Ian Gordon, analyst at BNP Exane Paribas.

Barclays, whose chief executive John Varley will be succeeded by investment bank boss Bob Diamond at the end of March, said on Tuesday it made an underlying July-September pretax profit of 1.27 billion pounds ($2.05 billion), up 8.5 percent on a year ago.

Barclays has emerged as one of the relative winners from the financial crisis after avoiding taking taxpayer cash and picking up the U.S. operations of Lehman Brothers at a knock-down price. But BarCap has lost some of its shine.

The unit's income fell to 2.8 billion pounds in the third quarter, down 14 percent from the previous quarter. That was its weakest quarter since the Lehman deal in late 2008, adding to fears normalised quarterly income will be below 3.7 billion pounds.

Analysts had expected income to drop to between 2.8 billion and 3 billion pounds after weak results from rivals.

BarCap's income in October was consistent with the run rate of the third quarter, but November has started better, executives said.

"We've not changed our perspective on BarCap's top line income generating capability as a result of a couple of weak quarters," said Chris Lucas, Barclays finance director. "Market conditions are challenging ... but we're confident that our income run rate will return."

BANK LEVY CHARGE

Barclays expects to pay about 250 million pounds from 2012 onwards under an annual UK tax that will be applied to bank assets, Lucas told reporters on a conference call.

Bad debts in the first nine months were down 31 percent to 4.3 billion pounds and it now expects impairments to fall 30 percent this year to near 5.7 billion from 8.1 billion in 2009. It had previously said impairments would fall by 15-20 percent.

The bank racked up 198 million pounds in losses on bad Spanish corporate loans in the quarter, down from 553 million in the first half of the year but enough to drag Barclays Corporate to a loss.

Barclays said it was "well equipped" to deal with regulatory changes as tougher global capital rules are implemented.

It expects risk-weighted assets to rise by about 150 billion pounds under new Basel III capital rules, but expects to cut that by about one-third by taking mitigating action, such as by shifting away from capital intensive business lines.

Barclays is one of the last banks to report third quarter results and echoed trends seen elsewhere.

Investment bank revenues have been broadly flat or slightly down from the second quarter, while rivals including Lloyds, HSBC, BNP Paribas have said bad debts are falling sharply.

The bank said it has has set aside about 4 billion pounds to pay BarCap staff, or 43 percent of this year's income, up from a ratio of 42 percent at mid-year.

Revenues from fixed income, currency and commodities (FICC) fell 14 percent from the previous quarter and equities and prime services dropped 36 percent, while investment banking and advisory income rose 9 percent.

Barclays said statutory pretax profit was 327 million pounds in the third quarter, down over 1 billion pounds, as it suffered a 947 million pound charge for marking down the value of its own debt, almost reversing an accounting gain it made on the debt in the second quarter.

Its underlying pretax profit was 4.27 billion pounds in the first nine months of the year, up 4 percent on the year. (Additional reporting by Sudip Kar-Gupta; Editing by Dan Lalor and Andrew Callus)