UPDATE 1-Bilfinger to shrink construction, expand services

* To cut construction business by two thirds

* Eyes IPO of Australian activities

* Focus now on higher-margin services business (Adds background, detail)

FRANKFURT, Nov 9 (Reuters) - German construction company Bilfinger Berger (GBFG.DE) said late on Monday it would drastically shrink its construction business, as a way to focus on more profitable activities.

Bilfinger said it would cut down the output volume of its construction business to around 2 billion euros ($3 billion) in the medium term, from around 6 billion euros in 2008.

Although construction could remain a core future activity for Bilfinger, the shift toward services "leads to an improved risk profile and greater profitability," the company said in a regulatory statement.

The move mirrors similar steps by rivals Hochtief (HOTG.DE), Vinci (SGEF.PA) or Balfour Beatty (BALF.L) which are shifting in to servicing industrial facilities.

The strategy makes them less dependent on the project-based construction market that is subject to hefty economic swings and where companies are undercutting each other on price.

Bilfinger's problems with the construction market were highlighted in September when the builder had to lower its earnings expectations for this year due to a legal dispute about a road construction project in Qatar. [ID:nL9315186]

The Mannheim, Germany based firm further said it was exploring floating its Australian activities, which had an output volume of around 2.6 billion euros in the current year.

Any proceeds from the potential offering would be used to expand Bilfinger's services segment, the company said. (Reporting by Edward Taylor; Editing by Tim Dobbyn)