By Victoria Waldersee

BERLIN (Reuters) -Continental reported earnings in line with consensus on Wednesday as successful price negotiations, lower inventory and stabilised supply chains enabled it to boost the performance of its automotive business and increase free cash flow.

The German multinational auto parts manufacturer adjusted the outlook for the adjusted margin of its tires business upwards to 12.5-13.5% from 12-13% previously, as higher pricing compensated for a decline in North America and Europe.

The company also said it now expects global production of passenger cars and light commercial vehicles to grow by 5-7% this year, up from its former forecast of 3-5%.

Continental struggled in the second quarter with freight costs, currency effects, and reducing working capital but took a more positive tone on Wednesday, with earnings up 7.1% from the previous year to 637 million euros ($680.57 million).

It had managed to reduce inventories and would carry on doing so in the fourth quarter in order to hit its adjusted free cash flow target of 0.8-1.2 billion euros, a steep jump from the 497.3 million loss reported so far between January to September.

"We still have significant ground to gain in the fourth quarter," Chief Financial Officer Katja Garcia Vila, formerly Dürrfeld, said.

Its automotive business, which suffered a loss in the second quarter, was back to profit with an adjusted earnings margin of 2.8% largely down to raising prices and stabilising supply chains.

Still, negative currency exchange rates prompted it to adjust the cars business sales outlook slightly downwards to 20 billion euros from 21 billion previously.

($1 = 0.9360 euros)

(Reporting by Victoria WalderseeEditing by Miranda Murray and Miral Fahmy)