* To cut 5,000 jobs, exit unprofitable markets, contracts
* CEO takes bolder action to repair struggling group
* Analysts worry plan falls short, could speed cash burn
* Plan is more limited than rival Nokia-Siemens Networks
* Alcatel shares drop 8 pct (Recasts lead, adds fund manager, CEO quotes, sector context)
By Leila Abboud and Gwénaëlle Barzic
PARIS, July 26 (Reuters) - Alcatel-Lucent on Thursday laid a fresh bet on mass job cuts and cost savings to survive stiff competition and weak demand hollowing out the global telecom equipment industry.
The move to axe 5,000 jobs and find 1.25 billion euros ($1.5 billion) by exiting unprofitable markets and contracts is the latest downsizing shift designed to set the company on a solid footing since an ill-fated merger in 2006.
But analysts warned the plan from Chief Executive Ben Verwaayen would not solve the group's structural challenges of being smaller than rivals, offering too many products and burning too much cash.
Verwaayen, brought on board in 2008 with a three-year mission to restore profitability, acknowledged the difficult situation and said hard decisions would have to be made.
"We had thought that 2012 would be better than 2011. We were wrong," he told a news conference.
The new tack comes after Alcatel issued a warning on 2012 profit and announced a second quarter operating loss last week. .
With the telecom equipment market shrinking as major operators cut back spending in a faltering global economy, competition on prices with rivals has intensified, Verwaayen said.
"We've had the sober realisation that the market is far different than it was 18 months ago," he said.
Alcatel's shares, which have tumbled 25 percent this year, at one point on Thursday slid 8 percent to an all-time low in a rising French market, before recovering to stand 4.9 percent lower at 1356 GMT at 83 euro cents.
MAKING THINGS WORSE
Bernstein analyst Pierre Ferragu said the cost-saving measures could aggravate Alcatel-Lucent's woes.
"The layoffs proposed will cost a lot of cash and risk accelerating the company's liquidity problems. We are more than ever in a situation where Alcatel risks not being able to refinance its needs in 2014," he said.
The company's cash burn accelerated in the second quarter to 511 million euros, although it confirmed its goal to have a "strong positive net cash position" at year end.
Alcatel is not struggling alone in the sector.
Ericsson posted weaker than expected results for the second quarter, while ZTE issued a profit warning. [ID:ID:nL3E8ID2LW]
Even Huawei Technologies, which has boasted the industry's highest profit margins in recent years, shed 22 percent of operating profit in the first half.
Under Verwaayen, Alcatel posted its first annual profit since it was formed in the tie-up between Alcatel SA and Lucent Technologies, but could now flip back into the red this year.
Asked if the company would be profitable in 2012, Verwaayen said: "This is a very difficult market to call ... I can only say that we think the second half will be better than the first."
Alcatel said its second-half adjusted operating margin would beat the first half when it stood at minus 3.7 percent.
Alcatel aims to cut 6.6 percent of the global workforce of 76,000, end unprofitable services contracts and exit or restructure in countries where it is weak. It also wants to squeeze more money out of its patent portfolio.
The proposals are more limited than rival Nokia-Siemens Networks' pledge to cut one quarter of its staff, or 17,000 jobs, and sell a raft of fixed-network product lines to focus more narrowly on mobile equipment.
Verwaayen said job cuts would be "global" but would not affect the 26,000 staff working on research and development.
Over 9,000 of Alcatel's employees are in France where layoffs are politically sensitive. Industry Minister Arnaud Montebourg said he will meet with Alcatel chairman Philippe Camus after the summer holidays.
Hervé Lassalle, a union representative at Alcatel, said the group was lapsing into its old pattern of rounds of layoffs and he was unconvinced by Verwaayen's actions since 2008.
"Our financial results are not good and the company is not well run in terms of organisation," he said.
Verwaayen played down the idea Alcatel would sell off large chunks of its business, saying it wanted to remain a major equipment provider with a broad product portfolio.
"The emphasis today is not on asset sales but on a more focused approach to efficiency at the company," he said.
A London-based analyst warned that Alcatel was entering a vicious cycle of selling off assets to generate cash, only to quickly burn through it to pay for restructuring costs.
"They were in a tight spot last year, so they sold the Genesys call centre business to raise $1.5 billion in cash. Now that money is almost gone," he said.
"What they really need now is demand in their core markets of US and Europe to pick up and that is not happening."
Christian Jimenez, fund manager and president of Diamant Bleu Gestion in Paris, cited the 2009 bankruptcy of Canadian gear maker Nortel Networks as a cautionary tale.
"I'm afraid Alcatel is slipping on the same slope as Nortel, going through a series of doomed restructuring programmes," he said, adding that his fund did not own the shares and had no plans to do so.
($1 = 0.8248 euros) (Editing by David Cowell)