* Says European paper volumes to fall in H1 sequentially
* Sees mostly flat paper prices in Europe
* Shares fall 3.5 percent
* CEO says remains open to merger talks (adds CEO and fresh analyst comment, details on industry trend)
HELSINKI, Jan 30 Finnish pulp, paper and energy company UPM-Kymmene gave a cautious outlook for its European paper business for the months ahead, disappointing those who had expected to see signs of an improvement in the troubled sector.
While cost cuts helped to bolster UPM's underlying profit in the fourth quarter, the company forecast lower delivery volumes and little change in prices at its European paper business in the first half of 2014 compared to the latter half of 2013.
UPM, along with its main rival Stora Enso has been closing paper mills in Europe for years in an attempt to stem the decline in paper prices.
Consumption of graphic paper grades such as newsprint and magazine paper has fallen more than 20 percent since 2008 as European consumers shift from printed media to digital devices.
The industry closed some 10 percent of the European capacity last year, but UPM executives said on a conference call that such steps weren't enough for it to lift prices in recent negotiations with customers such as publishers.
"Their outlook is disappointing, there were hopes of somewhat higher prices and improving paper results," said Karri Rinta, analyst at Handelsbanken.
Shares in the company fell 3.5 percent to 11.99 euros by 1303 GMT and analysts said they may need to lower expectations for 2014. A Reuters poll showed analysts on average had forecast an 11-percent rise in the company's adjusted operating profit this year.
UPM's shares had been on an uptrend in the past six months on expectations of further industry consolidation. Some investors have speculated that UPM and Stora may merge most of their paper assets into a joint venture, although many analysts see it as too difficult a task.
UPM chief executive Jussi Pesonen said he remains open to talks.
"We are prepared to have discussions, as there are obvious needs for consolidation... in the paper industry," he told a conference call.
UPM has been shifting its focus to pulp and energy while continuously cutting costs and paper production. Its quarterly adjusted operating profit grew to 207 million euros ($282 million) from 146 million euros a year earlier. ($1 = 0.7329 euros) (Reporting By Jussi Rosendahl; Editing by Ritsuko Ando and Elaine Hardcastle)