UPDATE 7-France Telecom withdraws TeliaSonera offer

(Adds France Telecom finance director, updates shares)

By Astrid Wendlandt and Adam Cox

PARIS/STOCKHOLM, June 30 (Reuters) - France Telecom (FTE.PA) withdrew a $40 billion plan to acquire TeliaSonera (TLSN.ST) on Monday, pleasing its own shareholders but casting doubt over the Nordic operator's future.

This tie-up always faced long odds: the French suitor was restricted by its financial targets while analysts say Sweden, a big TeliaSonera shareholder, was wary of selling at too low a price for political reasons.

TeliaSonera shares dropped 12.7 percent to 43.40 crowns. Shares in France Telecom, which trades under the Orange brand, jumped 7.6 percent as investors welcomed its decision to avoid a costly deal that offered few savings.

"By pulling out, France Telecom has shown that it is not in the business of getting big at all costs," said Vincent Griffon, analyst at CM-CIC Securities.

But John Davies, analyst at Dresdner Kleinwort, said France Telecom did not suddenly have a big conversion about the deal's logic and was defeated by its inability to pay enough.

"The worry is they'll find some other deal which they can get past the people (targeted)," he said.

No sooner did France Telecom announce its withdrawal than the market begin to think it might set its sights on Dutch operator KPN (KPN.AS), whose shares rose 2.5 percent.

France Telecom's finance director, Gervais Pellissier, said the firm saw no concrete alternative acquisition now, though in the medium term it wanted to strengthen its position in Europe.

France Telecom's indicative cash-and-shares bid, unveiled on June 5, was swiftly rejected as too low by TeliaSonera's board and by the Swedish government.

The deal-breaker was money.

In announcing the withdrawal, France Telecom said it was unable to reach agreement with TeliaSonera on financial conditions and said a deal was "not essential" to its strategy.

Pellissier, in an interview with Reuters, said returning cash to shareholders was now "more plausible", but it had not yet been discussed by the firm's board.

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