* Tax demand could reduce dividends from Algerian unit
* OT says tax decision based on "unfounded" allegation
* Shares plunge, drive Egypt index lower
(Adds analyst comment, share price move, background)
By Cynthia Johnston
CAIRO, Nov 18 (Reuters) - Egypt's Orascom Telecom ORTE.CA ORTEq.L has been told by Algerian tax authorities that it owes $596.6 million in outstanding taxes and penalties, the company said on Wednesday, sending its shares plummeting.
Orascom said the Algerian tax demand was based on an "unfounded and unacceptable allegation" that it did not keep proper accounts in 2005-2007. The firm said it would take legal steps to challenge the assessment.
The Cairo-based international mobile operator added that the tax claim could reduce 2010 dividends from its Algerian unit, which operates a mobile network under the brand name Djezzy.
"(Orascom Telecom) is confident in its ability and experience to mitigate this risk of a possible reduced liquidity position in an efficient manner to meet all its obligations as it did in the past," Orascom said in a statement.
The Algerian tax regulator had previously said Djezzy owed $50 million in taxes from 2004, which Orascom disputes.
Orascom shares plunged 11.2 percent on the news to 30.22 Egyptian pounds ($5.54), helping drag Egypt's benchmark index .EGX30 3 percent lower.
Telecoms analyst Nadine Ghobrial of EFG-Hermes said the tax, if Orascom is forced to pay it, would knock back her fair value estimate for the firm to 49 pounds from 52 at present.
"It (the news) was expected... However we did not know the extent of the amount, which is on the high side," Ghobrial said.
"If they actually have to pay the $596.6 million, then it will reduce the liquidity available to the whole group."
Orascom, whose Algerian headquarters was attacked and vandalised earlier this week following World Cup soccer tensions between the two countries, said the accounts of its Algerian subsidiary between 2005 and 2007 had been approved by both international and local statutory auditors.
Orascom said that Djezzy serves over 14.5 million mobile telephone customers in Algeria, giving it a 63.7 percent market share. It acquired a 15-year mobile telephone licence in Algeria in 2001 for $737 million.
Orascom has long been battling Algerian authorities over a new tax law requiring foreign firms to prove they do not owe tax before they can repatriate dividends. The company said in September it had received permission to repatriate half of its 2008 dividends to non-resident shareholders.
Orascom operates in emerging economies including Pakistan and Bangladesh and also has a presence in Zimbabwe and North Korea. It plans to launch operations in Canada this year despite an initial knock-back from regulators. ($1=5.454 Egyptian Pound) (Writing by Cynthia Johnston)