DUBAI, Jan 16 (Reuters) - Emirates NBD (ENBD) posted a 13 percent fall in fourth-quarter net profit on Monday as Dubai's largest lender was squeezed by higher costs of fixed deposits and wholesale funding, as well as lower fees and commission.

The bank, the first lender from the United Arab Emirates to report its earnings this quarter, made a net profit of 1.86 billion dirhams ($506.4 million) in the three months to Dec. 31, it said, down from 2.13 billion dirhams a year earlier but beating analysts' forecasts for 1.62 billion dirhams.

The profit drop follows a decline in the third quarter, which marked an end to a run of 16 straight quarters of rising earnings as profits are hurt by the impact of Dubai's slower growth.

The bank, 55.6-percent owned by state fund Investment Corp. of Dubai and viewed as a gauge of the health of the Dubai economy, said net interest income fell 8 percent due to rising costs of fixed deposits and wholesale funding.

Profitability for Gulf banks has been eroded by steeper funding costs as competition for deposits intensifies as lower oil prices squeezes liquidity in the banking sector.

ENBD's net interest margins declined to 2.29 percent during the quarter from 2.82 percent in the year earlier period as the bank said loan spreads did not keep pace with the higher cost of deposits, coupled with lower yields from investments.

However, it added that it expected net interest margins for 2017 to be in the 2.35 to 2.45 percent range, boosted by rate rises and a more stable liquidity environment.

The bank reported a 2 percent rise in annual net profit for 2016 to 7.24 billion dirhams, compared to 7.12 billion dirhams in 2015.

ENBD's board of directors recommended an annual dividend of 0.40 dirham per share for 2016, the same level as for the previous year.

($1 = 3.6729 UAE dirham)

(Reporting by Tom Arnold, editing by Louise Heavens) ((Tom.Arnold@thomsonreuters.com; +97144536265; Reuters Messaging: tom.arnold.thomsonreuters.com@reuters.net))