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* Organic service revenue down 4.8 pct in Q3
* Expects revenue improvement due to 4G demand
* Currency turmoil hitting emerging markets
By Kate Holton and Paul Sandle
LONDON, Feb 6 (Reuters) - Britain's Vodafone said itwas finally seeing early signs of a turnaround due to a growingnumber of customers and the take-up of more expensive 4Gservices, following yet another torrid quarter hit by fiercecompetition in Europe.
The world's second-largest mobile operator has reportedrecord falls in underlying revenue in the last 18 months, duealso to regulator-imposed price cuts and European consumersreducing the number of calls they made during the recession.
The firm, which is investing to improve network speed andcoverage after selling its U.S. arm in a $130 billion deal, saidorganic service revenue - stripping out items such as handsetsales, currency movements and acquisitions - was down 4.8percent in the three months to the end of December.
That was in line with forecasts and followed a 4.9 percentdrop in the previous quarter.
Chief Executive Vittorio Colao said, however, he thought thegroup could be nearing the bottom in terms of trading due to anumber of green shoots on the horizon.
Those included an easing of the price cuts imposed byBrussels, an increasing demand by customers in emerging marketsfor Internet on their phones, and a revamp of its pricing whichhas drawn more customers to pre-paid contracts in key markets inEurope.
The company, second only to China Mobile globallyin terms of subscribers and Britain's third-largest company bymarket capitalisation, confirmed its full-year outlook.
Shares in the group were up 2.8 percent at 1108 GMT, makingit the second-highest climber on the FTSE 100 Index,which was up 0.7 percent.
"Europe is still tough but there are a number of leadindicators," Finance Director Andy Halford told reporters,citing the increasing number of contract customers and theroll-out of the superfast 4G offering.
"When we put all of that together on Europe we're sayingthat over time we think that is going to be helpful in terms ofthe direction of travel on the revenue."
INTENSE PRESSURE
Thursday's trading update showed quarterly organic servicerevenue down 7.9 percent in Germany, down 5.1 percent in Britainand down 16.6 percent in Italy. Europe as a whole, which makesup two-thirds of revenue, was down 9.6 percent.
In its faster-growing emerging market division of Africa,Middle East and Asia Pacific (AMAP) it was up 5.5 percent.
In order to improve its offering, Colao said the group wasin talks with several local content providers, which couldmirror the deals it did in Britain where it offers a musicservice or sports clips with its faster 4G offering.
Vodafone described the pressures in Europe, where itcompetes with the likes of Telefonica, Orange and Deutsche Telekom, as intense.
That fits with the only other trading updates given so farfor this quarter by the big telecom groups, with Nordic operatorTeliaSonera and Dutch group KPN reportingweaker-than-expected quarterly profits.
With the U.S. arm sold, Vodafone's exposure to emergingmarkets has also increased. The British group is present inmarkets such as South Africa, Turkey and India, which have allbeen hit by falls in their currencies in recent weeks.
Colao said the recent turmoil in emerging markets had shownhis cautious approach to expansion had been the right move, butthat with mobile services remaining a basic need, he wasconfident in the future of those markets where they operate.
ADVERSE FX MOVES
Overall revenue on a reported basis in the AMAP region fell6.0 percent, dragged down by a 12.5 percentage point impact fromadverse foreign exchange rate movements, particularly withregard to the Indian rupee, the South African rand, the Turkishlira and the Australian dollar.
Despite the relentless pressures on the business in the coreEuropean markets and the uncertainty elsewhere, shares inVodafone have rallied in the last year as it negotiated the saleof its 45 percent stake in U.S. operator Verizon Wireless.
With the deal due to complete at the end of February,Vodafone has itself been seen as a takeover target. But the mostlikely candidate AT&T was forced by the takeover panel toreveal its intentions, and said last week it had no plans to buyVodafone in the next six months.
Vodafone shares have lost 7 percent since that announcementand hit their lowest since October on Wednesday. But sectorbankers and analysts expect the U.S. group, which has spokenopenly about its interest in Europe, to return at some point.
Analysts at Espirito Santo Investment Bank said Vodafone'sEuropean performance was slightly lower than expected, draggeddown by a disappointing organic revenue growth in Germany,although the company was gaining traction in adding newcustomers in the country. Its emerging market result, however,was slightly better than consensus.
"We think Vodafone's Q3 report is therefore OK and perhapsthe shares could see a relief rally today post KPN's poor Q4 andguidance earlier this week," they said.
