* Q3 service revenue misses forecast
* Hit by falls in Germany, Britain, Spain, Italy
* Shares up 2 percent
By Kate Holton
LONDON, Feb 7 (Reuters) - Trading at Vodafone worsened in the third quarter as customers in previously robustnorthern Europe joined those in the south by cutting phoneusage, adding impetus to the British group's efforts to cutcosts.
A worse than expected 2.6 percent drop in organic servicerevenue in the three months to Dec. 31 marked an accelerationfrom the 1.4 percent fall recorded in the second quarter andshowed the intense pressure on the world's second largest mobileoperator.
Shares in Vodafone rose by 1.7 percent however as the groupmaintained its outlook for the year and as analysts said theresults were not quite as bad as some had feared after torridresults from Dutch group KPN and Belgium's Mobistarearlier this week.
Investors also took strength from the line that thefull-year decline in earnings margins should show an improvingtrend, due to cost restructuring and savings programmes.
"Today's early spike in the share price is acknowledgment ofprogress being made," said Richard Hunter, head of equities atHargreaves Lansdown Stockbrokers. "There is also much to do.
"Plans are afoot to ratchet up the cost efficiencyprogramme. Meanwhile, the Indian tax case, general regulatoryoverhang and the fiercely competitive nature of Vodafone'sindustry remain serious headwinds."
Telecoms firms across Europe are struggling with themacroeconomic pressures at a time when they need to buildnetworks that offer faster speeds for consumers increasinglyaccessing the internet on mobile devices. They are also facingregulatory changes across the region and fierce competition.
"We expect peer results to show that Vodafone is doing worsethan peers," Bernstein analyst Robin Bienenstock said. "The paceof decline almost doubled in Europe while (emerging market)growth fell by about a third."
FIERCE COMPETITION
Vodafone is the first major operator to report its resultsfor the final three months of the year.
Of its 403 million customers, those in Britain and Germanycut back on usage to stick within their price plans while fewercustomers signed up to the network, opting for cheaper tariffs.
Telefonica's O2 turned more competitive in Britainand Deutsche Telekom's T-Mobile upped the pressure inGermany by offering cheaper deals for smartphone contracts.
The worsening picture in Germany and Britain, which hadpreviously remained resilient, compounded the ongoing problemsin the big southern European markets of Spain and Italy wherecustomers have cancelled contracts altogether.
Germany was also hit by regulatory cuts due to changes inthe amount operators can charge each other for connecting anddisconnecting calls, intended to lower costs to consumers.
Overall, revenue was down on an organic basis in Germany by0.2 percent, down in Britain by 5.2 percent, down in Italy by13.8 percent and down in Spain by 11.3 percent.
The group has also faced slowing growth in its emergingmarkets such as India, where it recorded revenue growth of 9percent, two percentage points lower than the previous quarter.
"Our results continue to reflect very difficult marketconditions in Europe," Chief Executive Vittorio Colao said. "Weare addressing this through firm actions on cost efficiency, andcontinuing to invest in areas of growth potential."
In response the group is increasing its cost-cuttingprogramme - it is considering cutting its workforce in Spain byup to a quarter to counter an escalating price war - and it hasrolled out a Vodafone Red price plan in five markets.
The new offering, which has been taken up by 2 millioncustomers, offers unlimited calls and text messages combinedwith data plans for Internet access, to prevent customers usingso-called over-the-top services to message friends for free.
The new plan has contributed to the lower revenue, Colaotold reporters, but he added that this had been expected andthat the new service would increase customer loyalty.
Vodafone (VOD)