(Adds details, analyst estimates)
MILAN, Oct 25 (Reuters) - Shares in Telecom Italia fell by more than 7 percent on Friday on fears that the board of the heavily indebted group is set to decide to sell more shares and cancel the dividend, traders and investors said.
Telecom Italia is battling to cut almost 29 billion euros ($40 billion) of net debt as its business feels the pinch of Italy's deep recession, harsh competition and slowing growth in Brazil, its second-largest market.
New chief executive Marco Patuano is reviewing the group's strategy and is due to present his plans to cut debt and reverse years of sluggish growth at a board meeting on Nov. 7.
After rallying 36 percent in the last three months on expectations of possible asset disposals, Telecom Italia's share price plunged on Friday to a two-week low of 0.6535 euros.
"The stock is down on talk the company will cancel the dividend ... They're mulling a capital increase of 2 billion euros since they won't be selling Brazil," a fund manager said.
"The stock is suffering from speculation the dividend could be scrapped," one trader said.
Telecom Italia, which paid 450 million euros in dividends out of its 2012 profits, was not available for comment.
Its 2013 dividend had already been expected by analysts to be halved to 0.01 euros per ordinary share from 0.02 in 2012, according to Thomson Reuters Starmine data.
A source close to the matter has said the company is considering a sale of its 67 percent stake in Brazilian mobile operator TIM Participacoes to cut debt.
But some analysts say any sale of the Brazilian unit would take time and Telecom Italia could still decide it needs a rights issue to raise more capital.
They say a share sale could be worth up to 2 billion euros, smaller than the 3 to 5 billion-euro cash call advocated by former chairman Franco Bernabe, who left the company this month after a clash over strategy with its core investors led by Telefonica.
In September the Spanish phone group reached a deal allowing it from next year to gradually take over Telco, the investment vehicle which controls Telecom Italia with a 22.4 percent stake and is owned by Telefonica, Intesa Sanpaolo, Mediobanca and Assicurazioni Generali.
Telecom Italia's credit rating was cut to junk status by Moody's earlier this month because of a failure to strengthen its balance sheet, making it more expensive to borrow money.
The company has enough cash resources to cover debt maturities due over the next couple of years, according to analysts' estimates. ($1=0.7245 euros)
(Reporting by Danilo Masoni, Stephen Jewkes and Stefano Rebaudo; Editing by Greg Mahlich)