UPDATE 2-Gazprom denies report E.ON seeks lower gas prices

* No such request from Gazprom's other clients

* Analysts believe Gazprom will have to give price breaks

* S&P raises Gazprom's short-term rating

(Adds details, analyst comments, rating upgrade)

MOSCOW, Aug 20 (Reuters) - Russian energy group Gazprom (GAZP.MM) denied a newspaper report on Friday that Germany's E.ON (EONGn.DE), the world's largest utility by sales, is seeking to lower prices for gas supply.

E.ON's unit Ruhrgas wants to adjust supply contracts because of clients' demand, Russian business daily Vedomosti newspaper reported, citing unnamed sources at Gazprom.

But Gazprom denied the report.

"No such talks are underway at the moment," Gazprom's spokesman Sergei Kupriyanov told Reuters.

Gazprom is facing a stiff challenge in Europe where spot gas prices are below its own long-term contract prices, which link natural gas and oil product prices.

Last winter, the company offered some European clients a spot pricing element in their contracts to stimulate offtake.

"We continue to be in talks with all of our suppliers about adjusting long-term delivery contracts to the most recent market conditions, but we won't comment on details," said E.ON's spokesman at the Essen headquarters.

Some 29 percent of gas procured by E.ON Ruhrgas in the first six months of 2010 came from Gazprom.

Vedomosti also reported that so far no other clients of Gazprom have recently requested to soften the terms of their contracts.

CONCESSIONS

Some analysts think that the firm will have to make some concessions in order not to lose its market share.

"We believe that Gazprom will ultimately have to give price breaks to all its customers that have or will have an alternative supplier (such as Germany, Italy, France, Turkey and the Netherlands)," Troika Dialog said in a note.

Analysts from Merrill Lynch/Bank of America Securities believe that suppliers still have an advantage in their relations with customers after Algeria's Sonatrach this week won a court battle with Spain's Gas Natural (GAS.MC) over pricing. [ID:nN16271101]

"Clearly utilities will continue to push to move away from oil-linked pricing and increased flexibility. However, the recent Sonatrach-GN arbitration shows that suppliers still have the upper hand," they said in a note obtained by Reuters.

Standard & Poor's Ratings Services also seems unfazed by the pricing pressure, raising its short-term rating on Gazprom to 'A-2' from 'A-3'.

"The upgrade follows our revision of the outlook on Gazprom (long-term corporate credit rating 'BBB') to stable on Aug. 18, 2010, as well as Gazprom's improved liquidity situation," it said. [ID:nWLA1183]

In June, Alexander Medvedev, Gazprom's export chief, said the average gas price for European customers will increase this year to $308 per 1,000 cubic metres from $302 last year.

Export volumes are seen averaging 145 billion cubic metres in 2010, up from 142 bcm in 2009. [ID:nLDE65L1AS]

By 1230 GMT, Gazprom's shares were down 1.1 percent to 158.3 roubles, underperforming the broader market in Moscow , which lost 0.8 percent. (Reporting by Vladimir Soldatkin in Moscow and Vera Eckert in Frankfurt; Writing by Vladimir Soldatkin; Editing by Jon Loades-Carter)