May 8 (Reuters) - State Bank of India said on Friday the Middle East crisis does not derail its credit growth and net interest margin forecasts for the ongoing fiscal year but warned that a prolonged conflict could hurt demand for loans.

The more than two-month-long Iran war threatens to raise inflation and slow growth in the world's third-largest oil importer that relies on the Middle East for the bulk of its oil and gas supplies.

An extended war lasting five to six months could dampen consumption demand and economic activity in Asia's third-largest economy, C.S. Setty, the chairman of India's largest bank, told reporters, especially if inflation rises above the central bank's 4% target.

Credit demand in India has remained strong in the three months ended March, supported by strong retail and corporate borrowing.

SBI continues to see robust credit demand in April-June, Setty said.

The lender maintained its loan-growth guidance for the fiscal year that started in April at 13% to 15%, and its estimate for a net interest margin of around 3%.

Earlier in the day, SBI reported a quarterly profit that missed analysts' estimates, sending its shares down 6.7% in their steepest single-session decline in nearly two years.

The broader markets fell 0.62% as renewed U.S.-Iran hostilities dragged global markets.

TREASURY LOSSES HIT QUARTERLY INCOME

SBI's earnings for the March quarter were dragged by a treasury-income slump, as a rise in bond yields hurt the value of debt holdings and curbs on forex market arbitrage led to losses.

The Reserve Bank of India imposed the forex curbs to protect a falling rupee in the last week of March, leading to losses of 570 million rupees for SBI on an arbitrage book of $5 billion. Most of these curbs have since been lifted.

Overall, income from SBI's treasury operations tanked to 12.59 billion rupees from 89.91 billion rupees a year earlier.

Income from the core lending business rose 4.1%, with the net interest margin contracting to 2.8% from 2.98% in the previous quarter.

The bank's asset quality improved, with gross bad loans as a percentage of total loans dropping to 1.49% from 1.57% at the end of December.

SBI's standalone net profit rose 5.6% to 196.84 billion rupees, missing analysts' expectations of 203.12 billion rupees, according to data compiled by LSEG.

($1 = 94.4625 Indian rupees)

(Reporting by Chandini Monnappa, Gopika Gopakumar and Bharath Rajeswaran, additional reporting by Mridula Kumar; Editing by Sonia Cheema and Mrigank Dhaniwala)

By Chandini Monnappa and Gopika Gopakumar