LONDON (Reuters) - Ladbrokes' (>> Ladbrokes PLC) customers shunned UK betting shops and the gaming machines inside during July's heatwave, contributing to a slide in first half operating profit which underscored the need to build up its online business.

Britain's second largest bookmaker has been less successful than larger rival William Hill (>> William Hill plc) in exploiting the growing online market and expanding overseas, making it more dependent on its chain of almost 2,300 shops on British high streets.

Overall group operating profit fell almost 20 percent to 85.7 million pounds, the company said on Thursday.

Its UK Retail business, still its largest division, was hit by higher costs and taxation and a slowdown from the popular gaming machines that had been a growth driver in recent years.

Ladbrokes also said a heatwave in July cut customer numbers in betting shops by up to 15 percent, with earnings from machines down 9.2 percent over the month.

"Although this weather effect is one off, it is unlikely that lost machine revenue will be recovered during the rest of the year," it said.

Ladbrokes warned investors in April it expected operating profit to fall this year after a poor performance from horse racing and online gaming in the first quarter.

DIGITAL ALLIANCE

Shares in Ladbrokes fell 3.5 percent to 200.3p in early business.

Ladbrokes shares had risen by 27 percent over the past year, compared with an increase of almost 60 percent for William Hill.

The growth of online gambling and relaxation of rules on gambling in a number of U.S. states have helped to attract investors to the sector.

Ladbrokes has taken steps to address some of the problems that have held it back.

It has formed an alliance with Playtech (>> Playtech PLC), the online gaming software company that was previously a joint venture partner of William Hill.

Ladbrokes also paid 30 million euros earlier this year to buy Irish-based Betdaq, a smaller rival to betting exchange company Betfair (>> Betfair Group Ltd).

Ladbrokes reported one-off costs of 21.8 million pounds in the first half, largely related to its new partnership with Playtech that will see a new mobile gambling site launched early in 2014.

Chief Executive Richard Glynn said he was disappointed that progress in reshaping the business was not yet reflected in the bottom line.

"We have maintained the dividend for shareholders, confident that the plans we now have in place will generate growth in earnings in 2014 and beyond," he said.

(Editing by David Cowell)

By Keith Weir

Stocks treated in this article : Betfair Group Ltd, Ladbrokes PLC, William Hill plc, Playtech PLC