* To take 1.77 bln euro charge for paper business
* Plans to close two paper machines, sell mill in France
* Shares up 6.4 percent (Adds outlook from analyst and company)
By Terhi Kinnunen
HELSINKI, Jan 17 Finnish forestry group UPM-Kymmene is to axe 860 jobs and cut paper production in an attempt to stem losses in an industry hit by tough economic conditions and consumers' growing preference for the internet.
Shares in UPM and other paper manufacturers rose on hopes lower output could boost prices and profitability, but analysts warned UPM's move to cut its graphic paper capacity by 580,000 tonnes would not be enough to put a floor on prices. UPM's total paper production capacity was 12.7 million tonnes in 2011.
"It's definitely the right thing to do. But if the question is whether it's enough, whether it can now become more profitable and gain pricing power, the answer is no," said Pohjola Bank analyst Henri Parkkinen.
"The announced cuts represent little more than 1 percent of total European capacity. We estimate European sales volumes will be going down 2 to 3 percent a year over the next three or four years."
The world's biggest producer of graphic paper has struggled with weak European demand for several years and said in October Europe's paper industry had around 10-15 percent overcapacity in newsprint, magazine and office products.
The region's debt crisis has accelerated a drop in demand that was fuelled by consumers shifting to the internet from newspaper and magazine subscriptions.
UPM said on Thursday it would book a 1.77 billion euro ($2.35 billion) charge for the paper business, which has seen a series of cost cuts and mill closures, when it publishes fourth-quarter results on Jan. 31.
The paper unit made a quarterly adjusted operating loss of 10 million euros, while the group's adjusted operating profit fell 6 percent to 138 million euros.
"UPM management does not expect significant enough improvement in its paper business' profitability in the foreseeable future," the company said in a statement.
It said it would close two paper machines - one at its mill in Rauma, Finland, and another at a mill in Ettringen, Germany - and put a mill in Docelles, France, up for sale.
The industry has been trying over the past decade to bolster prices by reducing capacity. But steps such as UPM's 835 million euro acquisition of Myllykoski, and subsequent closures of mills including one in Germany last year, have helped little.
UPM shares were up 6.7 percent to 9.37 euros by 1300 GMT. Shares in rival Stora Enso, which would also benefit from any lower capacity, rose 5.1 percent to 5.44 euros.
Evli analyst Markku Jarvinen also said it would take time for the capacity cuts to affect prices.
"This will not impact this year's prices at all," he said.
($1 = 0.7521 euro) (Editing by Ritsuko Ando, Dan Lalor and Sophie Walker)