UPDATE 4-Veolia to exit transport as it seeks to cut debt

* To shed 5 bln euros in assets in next 2 years

* To cut net costs by 120 mln eur in 2013

* To cut net debt to below 12 bln euros by 2013

* Confirms operating income to decline in 2011

By Caroline Jacobs and James Regan

PARIS, Dec 6 (Reuters) - Veolia Environnement , pressured by a slumping share price and two straight profit warnings, aims to sell its transport business as part of a plan to shed 5 billion euros ($6.73 billion) of assets in the next two years.

The world's biggest listed water group also plans to slash its dividend by 42 percent and aims to cut expenses by 120 million euros in 2013 as part of a bid to boost operating income and reduce debt.

Tuesday's announcements came at a much-anticipated investor day after Veolia unveiled only part of its strategy change in August -- including plans to exit about half of the 70 countries where it has businesses.

Investors, who have dumped Veolia shares this year, causing them to lose more than half their value, reacted cautiously to the plan. The stock gave up earlier gains of as much as 4.5 precent and by 1440 GMT they fell 0.3 percent, in line with France's main CAC-40 index.

"They've come out with an extremely aggressive objective which is not going to be easy to realise in this economic context," UBS analyst Per Lekander said. "It is the right thing to do though but they are not out of the woods yet."

"Earnings estimates need to come down, particularly for 2013," the analyst added.

Beyond 2013, France's Veolia forecasts annual underlying revenue growth of more than 3 percent and adjusted operating cash flow growth of more than 5 percent as it will focus on water, the environmental or waste business and energy.

Chairman and Chief Executive Antoine Frerot, who succeeded Henri Proglio about two years ago as CEO and about a year later as chairman, declined to comment on Veolia's outlook for 2012 and 2013 due to uncertainty over the timing of the asset sales.

'FEASIBLE' PLAN

Alongside Veolia's transport activities, which made revenues of 5.8 billion euros in 2010, Veolia also seeks to sell its UK regulated water activities, with sales of 317 million euros, and its U.S. solid waste business, with 614 million euros in sales.

Acknowledging the company's plan was "ambitious" amid Europe's economic turmoil, Frerot said he was confident in being able to carry it out.

"This plan is feasible, it's realistic and we will do it," he said at a news conference. "It is the first time that the company will attack the way it works, its culture more specifically."

The asset sales would help reduce Veolia's debt to below 12 billion euros by the end of 2013 from 15 billion at the end of September. After a profit warning last month -- Veolia's second since the end of July -- Fitch cut its credit outlook on Veolia to negative but kept its A- rating.

Veolia said in August it would dramatically shrink its operations in an effort to return to growth, reversing a previous costly expansion strategy under Proglio, who now heads French power utility EDF.

Veolia Transport, with 80,756 employees, runs buses, trains and ferries across 27 countries and includes Veolia Transdev, a joint venture created in March with state bank Caisse des Depots (CDC) which comprises all of the unit's French activities.

Frerot did not give a timeline for plans to sell its stake in Veolia Transdev but said that CDC could be interested in buying Veolia's 50 percent share and that financial and industrial investors could also be potential buyers.

CDC said in a statement issued on Tuesday following Veolia's comments that it intended to remain a shareholder in the unit.

Veolia said it was in talks to reshuffle its Dalkia energy services joint venture with EDF to boost the state-controlled power group's stake to 50 percent from 34 percent, thereby lessening its own stake.

Nevertheless, Veolia would keep operational control of Dalkia, Frerot said, adding that the partnership could benefit from EDF's international presence.

Veolia confirmed its forecast given last month that full-year adjusted operating income at constant exchange rates excluding Veolia Transdev would decline by a similar amount to the 12.9 percent drop in the first nine months of the year.

Veolia said it aimed to return to a dividend payout in line with the company's historic average after 2013.