* Puts 800 mln eur European generic business up for sale

* Plans 3.5 bln euro share buyback

* Q3 adj net income up 9.7 pct at 2.3 bln euros, vs 2 bln poll avg

* 2016 adj EPS seen up 3-5 pct excl forex, previously seen flat

* Receives rebuke from U.S. regulators over sarilumab facility (Adds detail on generics unit, share buyback, M&A, blow for arthritis drug)

By Ludwig Burger

Oct 28 (Reuters) - French drugmaker Sanofi stepped up its overhaul on Friday, putting its European generic drugs business up for sale and saying that a planned 3.5 billion euro ($3.8 billion) share buyback would not suppress its appetite for deals.

Sanofi's announcement came as it posted better than expected earnings and lifted its profit guidance for the year on strong growth at its biotech arm Genzyme and an early start to the U.S. flu vaccine season.

Third-quarter net income adjusted for special items rose 9.7 percent to 2.3 billion euros, against analyst expectations of about 2 billion euros. Revenue rose 2.1 percent to 9.65 billion euros, also beating the market view.

Sanofi now expects 2016 adjusted earnings per share to grow by 3 percent to 5 percent at constant exchange rates, having previously said they would be broadly flat. It continues to predict a negative 4 percent currency impact.

Sanofi stuck to its guidance for currency-adjusted sales at its embattled diabetes division to shrink by 4-8 percent a year on average from 2015 to 2018, saying that business outside the United States was holding up.

Pressure on U.S. operations has been rising after U.S. pharmacy benefit manager CVS and medical insurer UnitedHealth Group recently took steps to replace Sanofi's main insulin drug Lantus for a cheaper Ely Lilly product.

The shares jumped 5.9 percent to 72.90 euros at 0759 GMT, their highest in more than two months.

Analysts at Bryan Garnier and Deutsche Bank pointed to strong vaccine sales and good management of operating costs, while Berenberg analysts said it was reassuring to see Sanofi contain the decline in diabetes drug revenue.

Sanofi, which was trumped in August by Pfizer's $14 billion bid for U.S. cancer drug company Medivation, said the share buyback was mainly prompted by excess cash from an asset swap with Boehringer and did not constitute a retreat from the merger and acquisitions market.

READY TO SPEND

The company stands to receive 4.7 billion euros from the Boehringer deal signed in June.

CEO Olivier Brandicourt pointed to low debt levels and borrowing costs as well as strong cash flow.

"All of that will allow us to still act swiftly if attractive opportunites arise," he said in a conference call.

Quarterly sales at Genzyme grew 16.9 percent to 1.27 billion euros while the Sanofi Pasteur vaccines business lifted revenue by 14.4 percent to 1.8 billion euros, both adjusted for currency swings. Sales at the diabetes division were down 2.5 percent.

Along with the veterinary drugs business that Sanofi will transfer to Germany's Boehringer, the French group will also divest its European generic drugs business, which had sales of about 800 million euros in 2015.

Finance chief Jerome said profitability of the asset for sale, which excludes generic drugs in Russia, CIS and Turkey, is "not very far" from the group average, without elaborating.

The business requires investment in areas, such as complex generics, that Sanofi is not ready to make, he added.

In a setback for its experimental rheumatoid arthritis drug sarilumab, which analysts expect to generate more than 500 million euros in annual sales, U.S. regulators identified "manufacturing deficiencies".

Sanofi said it is unclear whether this will hobble the approval process for sarilumab, which Sanofi develops with U.S. biotech company Regeneron. ($1 = 0.9171 euros) (Editing by Maria Sheahan and David Goodman)