Adds CEO and analyst quotes and adds detail on China and US strategy, paragraphs 3,7 and 10

By Rachel More and Ilona Wissenbach

BERLIN/FRANKFURT, Oct 29 (Reuters) - German carmaker Mercedes-Benz on Wednesday reported stronger than expected margins at its core autos business as improved sales of premium models helped to offset one-off charges related to job cuts as well as declining sales in China.

Like rivals including Porsche P911_p.DE and BMW BMWG.DE, Mercedes faces particular challenges in the Chinese premium and luxury market, where a price war driven by local carmakers is hitting demand, while U.S. import tariffs also weigh.

"We are steering the company through a challenging business environment," said Chief Executive Ola Kaellenius, pointing to tariffs, intense competition in China and the transition to electric vehicles.

In the third quarter, Mercedes-Benz's return on sales at its car division was 4.8%, up from 4.7% in the same period last year and beating the 3.9% average estimate in a Visible Alpha poll.

This was supported by a 10% increase in top-end models, including the high-margin Maybach and AMG brands, while free cash flow was about 1.4 billion euros ($1.6 billion), prompting the company to resume its share buyback programme.

Operating profit, meanwhile, fell 70% owing to charges related to layoffs as the company implements restructuring measures to save 5 billion euros globally by 2027.

"I think you are clearly delivering on what you had promised us," Deutsche Bank analyst Tim Rokossa said on a results call with management, also pointing to the buyback resumption.

Shares in the company hit a seven-month high on the news, trading 6% up by 0923 GMT.

Mercedes' challenges are spread across its most important markets: tariffs in the U.S., falling sales in the highly competitive Chinese market and European emissions targets that have prompted an uneasy shift towards margin-squeezing electric vehicles.

Despite the difficulties in China, which Kaellenius described as a "multi-year task", he said the carmaker did not want to wade into a price war, focusing instead on moving its cost structures to that country and rolling out technology features to win over customers.

($1 = 0.8575 euros)

(Reporting by Rachel More and Ilona Wissenbach
Editing by Christoph Steitz and David Goodman)

((rachel.more@thomsonreuters.com))