UPDATE 1-Vattenfall Q2 profit dips, eyes costs

* Vattenfall operating profit 5.9 bln SEK vs yr-ago 6.3 bln

* Says reviewing investments, focus on costs and cash flow

* Says Kruemmel incident has dented confidence in company

(Adds detail, background)

STOCKHOLM, July 30 (Reuters) - Swedish state-owned power group Vattenfall [VATN.UL] posted a 7 percent fall in second-quarter operating earnings on Thursday and said it is keeping an eye on costs as the economic downturn weighed on energy demand across Europe.

Vattenfall, Europe's fifth largest electricity producer, said its operating profit in April through June fell to 5.9 billion Swedish crowns ($794 million) from 6.3 billion in the year-ago quarter.

The economic downturn coming on the heels of the global financial crisis has seen demand for power and gas fall across Europe as manufacturers scale back production and idle plants, eroding margins at utilities in the region.

Vattenfall, whose business includes operations in Germany, Poland and Britain as well as its Nordic home market, said its main priority was to safeguard its financial position and intergrate recent acquisitions.

"In view of the drop in demand and lower electricity prices, we are looking over our investment programme, focusing on cost control and cash flow, and we are evaluating opportunities to release tied-up capital," Vattenfall Chief Executive Lars Josefsson said a statement.

Second-quarter sales at the group, which early this month completed its biggest-ever acquisition to buy the production and supply arm of Dutch utility Nuon in a 10.3 billion euro ($14.52 billion) deal, rose to 42.1 billion crowns from 35.3 billion a year ago.

Vattenfall has come under fierce political pressure after a failed restart of its nuclear plant in Kruemmel earlier this month, causing power outages in nearby Hamburg. [ID:nL923514]

"Even though safety was never jeopardised at any point, we view the incident very seriously," Josefsson said.

"The event does not make a positive contribution to confidence in Vattenfall." ($1=7.430 Swedish Crown) ($1=.7095 Euro) (Editing by Hans Peters)