UPDATE 3-Finland gives tax breaks to wood sellers

(Adds Russia cancelling wood duty meeting, M-real Chairman, updates shares in pars 5 and 14)

HELSINKI, July 23 (Reuters) - Finland's government will cut capital gains taxes on timber sales to help its paper sector, which accounts for almost a fifth of the country's exports, cope with a shortage of raw materials.

Finland's forests are mostly owned by individuals and the tax cut is meant to persuade more of them to sell wood to big paper makers such as Stora Enso (STERV.HE), UPM-Kymmene (UPM1V.HE) and M-real (MRLBV.HE), to help offset the effects of a trade battle with Russia.

"We have to do everything possible so that this key industry sector can function in Finland," Prime Minister Matti Vanhanen told a news conference on Wednesday.

"We have to prepare for Russia possibly instituting higher wood export duties next year."

Shares in Stora Enso and UPM were up 3.1 percent and 2.2 percent respectively by 1338 GMT.

"This is a step in the right direction," said Pohjola Bank analyst Henri Parkkinen, who said it might boost domestic wood sales.

The cost of the reduction in wood tax would be about 170 million euros ($271 million) in 2009, the government said. Taxes would be reduced by 50 percent from April 2008 to end-2009 and by 25 percent in 2010.

"This gives the forestry sector time to adapt to new circumstances," Finance Minister Jyrki Katainen said.

The Finnish Forest Industries Federation welcomed the move and said it showed the government took the raw material shortage seriously.

"It is a positive attempt, provided that it will significantly increase the amount of domestic wood supply in Finland at a price which is more competitive than today," said UPM Chief Executive Jussi Pesonen, who chairs the federation.

"Competitive wood price and availability is one of the fundamental requirements for the long-term development of the forest industry in Finland. Otherwise, the industry cannot carry on profitable business in its current form," he said.

But M-real Chairman Kari Jordan said problems remain: "One has to remember the tax change will not solve problems with birch fibre."

Finland does not have enough birch fibre, a main raw material for many pulp mills, and has imported it from Russia.

Russia, an important source of wood for Finnish producers, raised export duties by 50 percent in April to 15 euros per cubic metre, and has said it would raise duties to 50 euros per cubic metre by 2009, which would more than double the cost of wood.

Finland plans to impose a new tariff on goods transported across Finland to Russia and compensate paper makers for higher costs.

In a separate statement on Wednesday, Finland said Russia's trade minister had cancelled a meeting over the wood duties and cross-border transport problems scheduled for this weekend, citing other work.

The trade battle threatens to delay both Russia's WTO membership and a partnership deal with the EU.

Finnish media have estimated up to eight major plants -- many of them Stora Enso's -- could close in eastern Finland due to a lack of raw materials, costing some 16,000 jobs. (Reporting by Sakari Suoninen, Tarmo Virki and Agnieszka Flak; Editing by Sue Thomas/Quentin Webb/Rory Channing)