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UPDATE 2-Spain's Telefonica suffers earnings hit from coronavirus and currencies

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MADRID, July 30 (Reuters) - Spain’s Telefonica posted sharply lower quarterly earnings on Thursday as measures to contain the coronavirus sapped demand for services including roaming and handset sales.

Telefonica last November launched a plan to boost revenue in a crowded European sector long struggling to grow, but shortly afterwards the pandemic started sweeping its main markets of Spain, Britain, Germany and Brazil.

Shares fell as much as 3% in early trade, underperforming Spain’s blue-chip index, after reported revenue and core earnings before depreciation and amortisation (OIBDA) slumped 14.8% and 25.3% respectively year on year.

The figures came in a shade below a consensus forecast provided by the company, the latter partly due to an impairment charge in Argentina.

Unfavourable foreign exchange movements, particularly for its Brazilian business, had a cumulative impact on OIBDA of 6.7 percentage points.

On the positive side, free cash flow improved, contributing to a reduction in net debt.

The month of May was the worst affected by the virus, but June saw a “notable recovery in commercial activity”, the company said. This included Spain, its largest market, which imposed one of Europe’s strictest COVID-19 lockdowns.

With restrictions gradually lifting, Telefonica maintained a 0.40 euros per share dividend and guidance for an increase in the ratio of core earnings excluding capital expenditure over revenue in 2022.

Aiming to cut back its operations in less profitable Latin American companies and further pare debt, the company announced the sale of its Costa Rica business for 425 million euros.

Telefonica shares have been tracking lower over the past five years and suffered a 37% drop so far this year, compared with a 15% fall in the benchmark STOXX Europe 600 index.

$1 = 0.8503 euros Reporting by Isla Binnie Editing by Ingrid Melander and David Holmes