UPDATE 2-Telenor says cash, new debt to fund India venture

* Telenor scraps unpopular share issue to fund India deal

* Seeks to pay no dividends for 2008 and 2009

* Signs $1.2 bln three-year loan agreement

* Shares pare gains after leaping as much as 8 pct

(Adds analysts, new quotes, shares)

OSLO, Jan 27 (Reuters) - Norwegian telecom group Telenor (TEL.OL) said on Tuesday it would fund an investment in mobile operations in India with cash flow and new debt, cancelling plans for an unpopular share issue.

Shares in Telenor leapt as much as 8 percent to 50.40 crowns before easing off to 47.30 crowns, still up 1.7 percent at 0821 GMT, outpacing a 0.4 percent rise in the DJ Stoxx telecoms index .SXKP.

"This is a considerably better option for shareholders than a rights issue," Pareto analyst Tore Toenseth said.

Telenor riled markets in October by announcing it would bankroll a $1.1 billion deal for a 60 percent stake in India's Unitech Wireless, part of Indian property developer Unitech Ltd (UNTE.BO), with a rights issue, sending its share sharply lower.

Telenor said on Tuesday it would propose no dividend payout for 2008 and 2009.

Telenor also said it had signed an 8 billion Norwegian crown ($1.19 billion) three-year loan that can be used to finance the Unitech Wireless deal. "This is very positive," said Espen Torgersen, an analyst at brokerage Carnegie.

"It is clear that this will be financed with short-term debt -- and in today's market, that will not be cheap but it will give a positive effect for current shareholders," he added.

Telenor said the loan was set "at market conditions and in line with its other loans" and repeated that it expected to close the Indian transaction during the first quarter of 2009.

The transaction still depends on an infrastructure deal in India.

"The investments in India still depend upon getting in place a deal to lease mobile towers. There are also a few other formalities that needs to be in place," Telenor spokesman Paal Kvalheim told Reuters.

Telenor, Asia's second-largest foreign telecoms operator with operations in Pakistan, Bangladesh, Thailand and Malaysia, has said it expects to turn an operating profit three years after starting up in India. ($1=6.732 Norwegian crowns) (Reporting by Wojciech Moskwa, Joergen Frich and Joachim Dagenborg; editing by Simon Jessop and Hans Peters)