(Corrects to make clear market cap data is in dollars, not euros)
* Policy switch follows EU-wide trend
* EDF stock down as much as 11 pct, then recovers slightly
By Geert De Clercq
PARIS, June 19 State-controlled French utility EDF lost nearly $7 billion of its stock market value on Thursday as the Socialist government scrapped a planned increase in electricity prices in order to protect consumers.
Energy Minister Segolene Royal told a morning TV show she had cancelled the 5 percent rise in regulated tariffs, set to take effect on Aug. 1, which had been decided by the previous government of Jean-Marc Ayrault.
Royal, a powerful Socialist politician who lost a presidential election to conservative Nicolas Sarkozy in 2007, was appointed energy minister in the new government of Prime Minister Manuel Valls in early April and immediately began talking about lowering energy costs.
The tariff review is part of a Europe-wide trend to cap energy prices as governments try to protect consumer spending in the face of stubbornly high unemployment.
French President Francois Hollande is struggling at record lows in opinion polls and his Socialist party took a drubbing in recent European and municipal elections.
Royal, Hollande's former partner and mother of his four children, had already scrapped a planned tax on truck traffic. Earlier this week she presented a new energy law that aims to boost France's use of renewables but did little to implement Hollande's promise to reduce its reliance on nuclear energy.
"A 5 percent tariff increase had been set for August 1. The bills will not increase," Royal told BFM television, adding that new tariffs for Jan. 1 would be announced in October.
"I will make the calculation with energy regulator CRE, an independent authority, which will work out the increase, or maybe a fall, based on the reform I have put in place," she added.
Shares of EDF, which is 85 percent state-owned, fell as much as 11 percent in their biggest slide since their 2005 stock market listing.
They later recovered slightly on market rumours there might be a tariff increase in October after all, but by 1303 GMT were still down 9.5 percent.
At the energy ministry nobody was available for comment.
"The market is edgy because these comments are considered as inconsistent with communication to date and undermine the confidence in the regulatory visibility on EDF, which should be entitled to cover its costs," Societe Generale analyst Vincent Ayral said.
EDF shares are highly sensitive to tariff moves.
They had jumped as much as 10 percent on July 9, 2013, when the Ayrault government announced a 5 percent increase of electricity tariffs for the summer of 2013 and a second increase for the summer of 2014, in a bid to help EDF meet its power production costs.
Those tariffs hikes were the biggest in at least a decade and EDF shares doubled between March 2013 and March 2014 as the market anticipated their impact on EDF's profits. The shares had been on a downtrend since early April this year and were down 7 percent over the past three months based on Wednesday's close.
French consumers association UFC-Que Choisir welcomed Royal's decision to scrap the planned hike but urged her to come up with a new legal framework to set power prices and prevent legal challenges.
Smaller competitors of EDF and gas utility GDF Suez have successfully challenged government price caps on energy in court, arguing they created artificially low prices that did not cover utilities' production costs and prevented smaller competitors from winning market share from the big two.
Royal's comments belatedly catch up with a Europe-wide trend to cap power prices, and mark a sharp reversal in government policy, which is set to hurt EDF's profits.
Thanks to the 2013 tariff hike and despite a warm winter, EDF in February posted a 4.8 percent rise in core earnings in a rare show of strength among Europe's struggling utilities.
Other European utilities such as Iberdrola, Endesa and Enel face similar pressures. Spain is overhauling its energy sector by introducing a new power generation tax and cuts to renewable energy subsidies, while Italy's government advocates a cut in network costs as part of a drive to reduce energy bills.
In Britain, power prices have risen to the top of the political agenda following opposition leader Ed Miliband's pledge in September to freeze bills for 20 months if he wins the 2015 election. ($1 = 0.7368 Euros) (Reporting by Geert De Clercq and Marion Douet; Editing by James Macharia and Mark Trevelyan)