* Proposes dividend of $0.20 from 2013, vs $0.75 in 2012
* Sees challenging conditions continuing in Q4
* Q3 core profit $1.34 bln; Reuters poll consensus $1.33 bln
* Sees 2012 core profit of $7 bln
* Shares down 4.1 pct, among weakest of European blue-chips (Adds finance chief, analyst comment, updates shares)
BRUSSELS, Oct 31 (Reuters) - ArcelorMittal, the world's largest steelmaker, plans to slash its dividend and focus on cutting debt after slowing demand from China and sluggish European markets drove it to a third-quarter loss.
The group, which makes 6-7 percent of the world's steel, said on Wednesday market conditions would remain tough this year and scrapped its forecast for core profit per tonne in the second half to be similar to that in the first.
However, finance chief Aditya Mittal was hopeful of some improvement in 2013, following a recent pick up in iron ore and Chinese steel prices and stability in the price of scrap.
"Clearly Q3 and Q4 represent very challenging operating conditions, but should mark the low point in the cycle," he told a conference call.
Shares in ArcelorMittal, formed in 2006 when the steel business of Indian-born tycoon Lakshmi Mittal bought European peer Arcelor, were down 4.1 percent at 1115 GMT, among the weakest in the blue-chip FTSEurofirst 300 index .
The $500-billion-a-year steel industry - a gauge of the global economy - has slowed sharply this year from last, as a moderation in China's economic growth has compounded weak demand from austerity-ravaged Europe.
The World Steel Association earlier this month forecast steel demand would rise by 2.1 percent in 2012, down from 6.2 percent in 2011. It had forecast 3.6 percent growth in April.
Other steelmakers are hurting too. South Korea's POSCO , the world number four, last week posted a 25 percent drop in quarterly profit.
ArcelorMittal, whose output is more than double that of its nearest rival, reported third-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.34 billion, in line with forecasts, but the lowest in three years.
It sees European Union demand falling 8 percent this year, leaving it 29 percent below pre-crisis levels, and has responded with plans to close blast furnaces in Belgium and France.
Including an impairment and restructuring charges related to those closures, as well as a one-off hit from a new U.S. labour contract, ArcelorMittal tumbled to a net loss of $709 million, greater than the $193 million loss expected.
ArcelorMittal said it planned to cut its annual dividend to $0.20 per share in 2013, saving $1 billion as it battles to reduce debt and keep a valuable investment-grade credit rating.
The group, which paid out a dividend of $0.75 per share this year, said it would also reduce capital spending next year.
Net debt climbed $1.2 billion during the third quarter to $23.2 billion at the end of September.
Analysts said the dividend cut was steeper than expected, though not as painful for shareholders as a rights issue.
Kepler's Rochus Brauneiser was disappointed by the rise in debt and that the company gave few details on other ways of cutting borrowings, like selling a stake in mines.
"As nothing has materialized so far, they remain under pressure," he said.
Ratings agency Standard & Poor's has already reduced the steelmaker's debt to junk status. Moody's has cut its outlook to negative and said ArcelorMittal needs to lower net debt by $5 billion by early 2013 to avoid a downgrade.
ArcelorMittal has said losing investment grade status completely would cost about $100 million in interest charges.
It has already sold non-core businesses, including stakes in Australian coal miner Macarthur Coal and in Turkish steelmaker Erdemir.
Sources familiar with the matter say it has also begun exploring the possible sale of a minority stake in its Quebec mines.
Aditya Mittal, Lakshmi Mittal's son, said ArcelorMittal did not plan to divest core mining assets, but could follow the example of others in selling a stake to a customer.
He declined to say whether the company wanted to buy the Steel Americas assets put up for sale by ThyssenKrupp, which analysts say could go to a price-cutting competitor.
"Clearly we are a player in the Americas, we are the largest steel company in the world. It is something we need to take a close look at," Aditya Mittal said.
For the full year, ArcelorMittal said it expected EBITDA to be around $7 billion. The average Thomson Reuters I/B/E/S forecast is $7.34 billion. (Additional reporting by Clara Ferreira Marques.; Editing by Rex Merrifield and Mark Potter)