* Holds half-year dividend at 7.62 pence/shr
* Says UK must change risk, economic forecasts for rail bids
* H1 pretax profit 48.7 mln stg vs 84.5 mln stg
* Shares down 4.1 pct
By Rhys Jones
LONDON, Nov 7 Britain's FirstGroup froze its six-month dividend on Wednesday after the government's withdrawal of a major rail contract, raising the prospect of a lower full-year payout.
The bus and rail operator said it had held the dividend at 7.62 pence after the British government last month tore up a deal to award it the West Coast main-line franchise after flaws were found in the bidding process.
FirstGroup chief executive Tim O'Toole said he was in talks with the government over recouping bidding expenses and other costs incurred as the company prepared to roll out the service linking London and Scotland after it was told it had won the bid.
Some analysts said FirstGroup may cut its full-year payout to shareholders and push for a rights issue next year to raise money.
"The dividend will definitely be cut; and FirstGroup will have a tricky decision to take regarding debt reduction, further asset sales and a rights issue," said Liberum analyst Peter Hyde.
The government froze the award of the West Coast line, a jewel in the crown of the UK rail network, and other rail franchise competitions after the Department for Transport (DfT) said flaws had been uncovered in its handling of bids.
Incumbent West Coast main line operator Virgin Trains, a venture between Richard Branson's Virgin Group and Stagecoach , will continue running the service for a further nine to 13 months from December, while the DfT plans a competition for an interim agreement.
"We still have an incomplete explanation from government, who clearly need to make adjustments to the mechanism they use to asses risk and changes to macroeconomic conditions between bids," O'Toole said on Wednesday.
"I don't think the franchising model is completely broken and it is not something that needs months and months of work to fix."
FirstGroup said its underlying pretax profit fell 42 percent to 48.7 million pounds ($77.83 million) in the six months to the end of September. That was due to an expected fall in profit at its bus unit, which it is restructuring, and the end of some subsidies received by its rail business.
It was also hit by higher fuel costs and the absence of a one-off exceptional gain made this time last year on its UK bus pension scheme.
The company said debt has risen by 244 million pounds to 2.08 billion pounds since April.
Revenue rose 2.6 percent to 3.25 billion pounds.
Shares in FirstGroup, which have fallen 40 percent this year, largely because of the West Coast rail fiasco, were 4.1 percent lower at 197.3 pence by 1013 GMT.