* Investors see European operation as a drag on India's Tata
* Tata Europe CEO says will continue to respond to weak market
* Indian operation enjoys lower costs, stronger demand
PORT TALBOT/NEW DELHI, June 6 In the shadow of Britain's largest steel works, the town of Port Talbot braces itself after Tata Steel's $1.6 billion writedown.
The worry is that its Indian parent company is tiring of pouring gains from lucrative operations into European units struggling to turn profits.
"It's just the kind of a business you don't want to be in, especially their UK assets, they are higher costs," said Willem Schramade, materials equity analyst for the 7 billion euros ($9.12 billion) Global Equity fund at Robeco. "The most obvious thing is to sell the UK assets, but to who?"
Dutch Robeco has already sold its stake in Tata. In the Welsh valleys the financial calculations could be more brutal.
Steven Garvey used to work at the Port Talbot plant, like his parents, grandfather and seven uncles before him, before being made redundant in the 1980s, with 10,000 others.
"I would be absolutely terrified to see Tata even catch a cold," he said. "If the steelworks closed we would certainly see a lot of houses and shops repossessed."
The management in India has said a sale of some European assets - which include another British plant in Scunthorpe - is possible, if the right opportunity came up.
But buyers will be hard to find given Europe's flailing steel industry, struck by shrinking demand - down 30 percent since 2008 - over capacity and tight financing conditions.
Tata's European operation is the region's second largest steel producer, so other options could be production cuts or even mothballing of some plants, sources said.
Since it bought Anglo Dutch producer Corus for $13 billion in 2007, Tata has already cut EU output from 23 million tonnes to less than 15 million currently.
Cutting capacity further would be another blow for Europe's manufacturing sector after the shutdown of the ArcelorMittal plants at Florange in France.
"I think (Tata Steel Europe CEO Karl-Ulrich) Köhler knows that the only chance to survive is to close everything except Ijmuiden, the Dutch plant, which is still in a good shape...the UK assets are all in very bad shape," an industry veteran said.
Köhler told Reuters he would continue responding to market weakness.
Asked whether this could include mothballing some plants he said: "I wouldn't say mothballing of plants, but I would say we will certainly, as in the past, continue to adapt as fast as necessary," adding that often this includes production cuts.
EBITDA margin for Tata Steel Europe was 1 percent for the financial year ended on Mar. 31. It was 31 percent for India.
In Port Talbot, known for its local actors made good - Richard Burton, Anthony Hopkins and Michael Sheen - hopes are based on a recently completed $280 million investment to rebuild one of the two blast furnaces.
Producing steel profitably in Britain has become difficult given shrinking demand plus higher production, labour and logistic costs, compared with mainland Europe.
"If you move the steel industry out of the UK what happens to the downstream activity like car production for instance?" General Secretary of trade union Community, Michael Leahy, said.
"If one of the major dominos falls over that doesn't bode well to the rest of the economy."
Port Talbot furnaces produce up to 4.5 million tonnes of steel a year, used to make cars and domestic appliances including washing machines and dishwashers.
Among the plant's largest customers are Caterpillar, Honda and Nissan.
Scunthorpe produces steel mainly for construction and infrastructure, sectors crimped by the current economic climate. That could put the plant in a more delicate position, should cutbacks come, analysts said.
Scunthorpe has supplied Network Rail but the contract comes up for renewal in 2014. The outcome could affect the plant's future.
Nic Dakin, a member of parliament representing Scunthorpe, said the rail regulator should be mindful of any impact of its decision on Britain's economy.
"Any UK government worth its salt would want us to have the capacity to produce our own steel," Dakin said.
"Manufacturing ought to be part of our future."