UPDATE 2-Vodafone to ramp up investment as trading suffers
* To spend more than expected, earlier than expected
* Suffers record drop in Q2 organic service revenue
* Hit by regulation, recession in Europe
* Vodafone shares up 0.7 pct, while telecoms index down
LONDON, Nov 12 (Reuters) - Britain's Vodafone will spend 7 billion pounds - more than expected, earlier than expected - to increase the speed and capacity of its networks and reverse a record fall in revenues resulting from its struggling European business.
The world's second-largest mobile operator, which is using some of the proceeds from the $130 billion sale of its U.S. arm to Verizon Communications to upgrade its infrastructure, said it would spend 3 billion pounds in Europe, 1.5 billion in its emerging markets and the rest on fixed-line assets and corporate customers.
It will complete the programme by March 2016 - a billion pounds more than expected and a year earlier than forecast - to meet the demand of consumers who want on-the-go internet access via smartphones and tablets.
"Whilst trading conditions in Europe remain very tough at present, we are encouraged by the forecast return to economic growth over the next two years," Chief Executive Vittorio Colao said.
Shares in Vodafone were up 0.7 percent at 228.85 pence at 0940 GMT, outperforming the European telecoms index, which was down 0.3 percent.
The group, which is seen as a possible bid candidate for U.S. giant AT&T, announced the details of its "Project Spring" spending programme as it reported first-half results showing the pressures across the group.
Organic service revenue, which strips out one-off items such as handset sales, was down 4.9 percent in the second quarter due to regulator-imposed price cuts and fierce competition in Italy, Spain, Germany, Turkey and Britain.
That was worse than the 3.5 percent fall recorded in the first quarter and well below the last record fall of 4.2 percent in the fourth quarter.
Credit rating agency Moody's said on Tuesday it expected a fifth year of revenue decline in 2014, though operating margins would stabilise, helped by cost cutting and the end of regulatory cuts to mobile call termination fees.
"We view the decision to accelerate and expand Project Spring positively, given it brings forward the commercial benefits and increases competitive pressure on Vodafone's indebted and sub-scale rivals, without materially impacting Vodafone's strong financial position or its dividend growth," Goldman Sachs said in a note.
Vodafone said the spending plans would have a peak impact on core earnings of 0.6 billion pounds in the 2015 financial year. It expects the investment to result in incremental free cash flow of over 1 billion pounds in the 2019 financial year.
Colao told reporters the group had ramped up its investment programme to put it in the strongest possible position for when the economy started to improve.
He said he expected Vodafone's strongest rivals, likely to include Telefonica, Deutsche Telekom and Orange, to follow suit while smaller rivals would likely struggle.
Strong growth in data consumption by smartphones, tablets and other devices means network quality is becoming more important in the fight to win and keep customers.
With that in mind, Vodafone decided to plough some of the proceeds from the sale of its 45 percent in Verizon Wireless into infrastructure. But the bulk of the windfall - $84 billion - will be handed to shareholders, and the rest used to cut debt.
The move to invest could also be a sign that Vodafone is betting the sector will benefit from softer regulation from the European Commission, which has spent years forcing down roaming and other types of mobile call fees.
Overall, first-half core earnings were down 4.1 percent at 6.6 billion pounds, ahead of a company-compiled estimate of 6.4 billion pounds.
The group also recognised additional deferred tax assets of 17.7 billion pounds in relation to the group's historical tax losses, but it took a 3 billion pound tax charge in relation to the sale to the U.S. group.
"The overall performance of the Group in the first half of the current financial year has been in line with our expectations," the company said on Tuesday.
"We are therefore on target to deliver adjusted operating profit of around 5 billion pounds and free cash flow in the 4.5- 5.0 billion pounds range."