UPDATE 1-Sappi Q2 basic loss per share 7 U.S cts, sees tough '09

* Says to keep cutting output to meet lower demand

* Challenges to continue through 2009

* Shares down 3.9 pct (Adds details)

JOHANNESBURG, May 5 (Reuters) - Sappi (SAPJ.J), the world's biggest maker of fine paper, reported a basic loss per share of 7 U.S. cents for the second quarter, hit by a slump in demand, and said it expected the rest of 2009 to remain challenging.

In 2008, Sappi reported basic earnings per share of 43 cents for the same period.

"The quarter was characterised by a sharp decline in our sales volumes, which was driven by declines in demand for coated paper and pulp in our major markets," it said in a statement.

Shares in the company fell 3.9 percent to 24.01 rand, compared with a flat JSE Top-40 blue-chip index .JTOPI.

Second-quarter sales fell to $1.31 billion from $1.47 billion the previous year.

The company said it would continue to curtail production for supply to match demand.

While it expects pricing to remain weak for the rest of the year, it expects profitability of its businesses to improve.

"We expect our profitability to improve in the next quarter as a result of the actions we have taken to manage costs, continued declines in input costs and the gradual achievement of acquisition synergies," it said. The paper industry has struggled for six years to climb out of a slump, burdened by overcapacity and soft prices, and the global economic crisis has dimmed prospects for 2009 as demand for basic materials, including paper, has dropped further.

Sappi curtailed production by about 30 percent during the quarter across all of its European mills.

While demand in Southern Africa has not dropped as much, Sappi said in the past it had cut paper production in the region by around 10 percent and pulp production by 30 percent from its expanded capacity.

Sappi said it would cut 2009 capital expenditure to a minimum of below $200 million, down from the $505 million spent last year. (Reporting by Agnieszka Flak)