PARIS, July 26 (Reuters) - Telecom equipment maker Alcatel-Lucent will axe 5,000 jobs and exit or restructure unprofitable markets in a drive to cut costs by 1.25 billion euros ($1.5 billion) by the end of next year as it battles stiff competition and weak demand.

The move comes after the Franco-American group warned last week it would miss its 2012 profit margin target and announced a second-quarter adjusted operating loss of 40 million euros.

The decision to cut 6.4 percent of the group's global workforce of 78,000 is a sign Chief Executive Ben Verwaayen believes bolder action is now needed to stem a plummeting share price and perennial problems like cash burn and high costs.

However, the proposals are more limited than rival's 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.

Alcatel is also embarking on the plan as major telecom operators are cutting back spending on network equipment in a faltering global economy and competition with Huawei Technologies and Ericsson remains fierce.

Bernstein analyst Pierre Ferragu said the plan was not ambitious enough given the group's challenges and wouldn't solve structural issues like its too-broad product range.

"On the contrary, the layoffs proposed will cost a lot of cash and risks 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.

Shares in Alcatel were the worst performers on the French blue-chip CAC 40 index in early trading, down some 7.5 percent. Its market value is about 1.9 billion euros.

Under Verwaayen, Alcatel finally reached its first annual profit since it was formed in the 2006 merger of Alcatel SA and Lucent Technologies, but the CEO has not been able to deliver on a promised turnaround plan in full.

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 on a call with reporters. "But we do recognise that we cannot be all things to all people."

Alcatel shares have plummeted nearly 25 percent this year to reach their lowest point ever. In comparison, the European technology index has risen 4.1 percent this year.


TOUGH CALL

Alcatel said it would seek to get rid of unprofitable services contracts in which it manages networks for operators, squeeze more money out of its patent portfolio, and exit or restructure in countries where it is weak.

No detail was given on where the job cuts would occur, nor what asset sales might be considered. Verwaayen told reporters on a conference call that job cuts would be "global" and would not include research and development staff.

Alcatel also gave a new annual profit target of posting a second-half adjusted operating margin better than the first half when it stood at minus 3.7 percent.

Asked whether he still hoped the company would be profitable this year, Verwaayen said: "This is a very difficult market to call ... We think the second half will be better than the first."

He added that weakness in demand was not limited to telecom operators in Europe and challenges were cropping up all over the world.

"The market conditions are pretty tough and we don't think the market will improve anytime soon," he said.

Alcatel confirmed its prior target of aiming for a "strong positive net cash position at the end of 2012".

($1 = 0.8248 euros) (Editing by James Regan and Mark Potter)