* Proposes dividend of $0.20 from 2013, vs $0.75 in 2012
* Sees challenging conditions continuing in Q4
* Q3 core profit $1.34 bln; Reuters poll consensus $1.33 bln
* Sees 2012 core profit of $7 bln
(Adds detail, background, shares)
BRUSSELS, Oct 31 (Reuters) - ArcelorMittal, the world's largest steelmaker, said it would slash its dividend and focus on cutting debt after slowing demand from China and sluggish European markets drove it to a third-quarter loss.
The group, which makes 6-7 percent of the world's steel, said on Wednesday there was little prospect of a quick recovery in the $500 billion steel industry - a gauge of the global economy - and scrapped its forecast for core profit per tonne in the second half of the year to be similar to that in the first.
``Very challenging operating conditions for ArcelorMittal ... are expected to continue in the fourth quarter,'' Chief Executive Lakshmi Mittal said in a statement.
ArcelorMittal shares fell 2.8 percent in early trade, making them among the weakest performers in the FTSEurofirst 300 index of leading European stocks.
The steel industry has slowed sharply this year from last, as a moderation in China's economic growth rate has compounded weak demand from austerity-hit Europe.
The World Steel Association earlier this month forecast steel demand would rise by 2.1 percent in 2012, down from 6.2 percent in 2011. It had forecast 3.6 percent growth in April.
Other steelmakers are hurting too. South Korea's POSCO , the world number four, last week cuts its annual investment target after a 25 percent drop in quarterly profit.
ArcelorMittal reported a third-quarter core profit of $1.34 billion, in line with analyst expectations, but its lowest level in three years.
The group said it believed European Union demand would fall by 8 percent this year, making it 29 percent below pre-crisis levels. It has responded by announcing the closure of blast furnaces in Belgium and France.
Including an impairment and restructuring charges related to those closures, as well as a one-off hit from a new U.S. labour contract, ArcelorMittal tumbled to a net loss of $709 million, greater than the $193 million loss expected.
ArcelorMittal, whose output is more than double that of its nearest rival, said it would propose reducing the annual dividend payment to $0.20 per share in 2013, only to be progressively increased once deleveraging was complete. It paid out $0.75 this year.
Economic weakness, particularly in Europe, prompted ratings agency Standard & Poor's to cut the steelmaker's debt to junk status in August. Moody's cut its outlook to negative.
The latter has said that ArcelorMittal must cut net debt by $5 billion by early 2013 to avoid a downgrade.
For the full year, ArcelorMittal said it expected core profit to be around $7 billion. The average Thomson Reuters I/B/E/S forecast is $7.34 billion.
(Editing by Rex Merrifield and Mark Potter)