* Operator says free cash flow will increase to about 5 mln euros
* Forecasts higher payout for shareholders this year
* Full-year adjusted core earnings rise 5.8 pct
* Shares up 4.1 pct (Adds CEO comments, analyst reaction, shares)
LONDON, May 16 (Reuters) - Britain's Vodafone forecast a jump in cash generation this year, allowing it to reward shareholders with a higher dividend as it eases back on network investment and moves to solve problems in India where a new price war has broken out.
The company's upbeat outlook sent its shares more than 4 percent higher, relieving investors after a tough year that saw the group report a 6.1 billion-euro ($6.7 billion) loss, dragged down by last year's $5 billion write-down on Vodafone India.
Chief Executive Vittorio Colao said that excluding the Indian business, adjusted core earnings rose 5.8 percent to 14.1 billion euros, beating market expectations, and growing faster than revenues as the company improved efficiency.
He said earnings would grow by between 4 and 8 percent this year to 14-14.5 billion euros - analysts had penciled in 13.8 billion euros - and it would generate about 5 billion euros of cash, up from 4.1 billion euros last year.
The company said the level of cash generation, combined with growth and a robust balance sheet enabled it to "confirm a progressive dividend policy."
The final dividend was increased by 2 percent to 10.03 euro cents.
"We are getting into a space where we see a balance between our investment needs, rewarding our shareholders and having good enough cash flow to pay for spectrum," Colao told reporters.
Analysts at Jefferies, who have a "buy" rating on the stock, said progress in reducing costs supported Vodafone's confident dividend growth guidance.
"Vodafone reasserts its intention to grow its dividend per share annually - consensus has dividend flat - a message that might be seen as contrasting against BT's more hesitant outlook last week," they said.
Struggling with a different set of problems, rival BT said last week in raising its dividend by 10 percent that the rowth rate would not be the same next year.
For Vodafone the growth in free cash flow, which will come as the company reduces investment following completion of its Project Spring program to improve its networks in Europe and other markets, is ahead of analysts' predictions of 4.66 billion euros.
Regulatory headwinds in Europe, however, mean Vodafone's progress has been bumpy in the last year and will not be completely smooth in the year ahead.
Organic service revenue growth slowed to 1.5 percent in the final quarter from 2.1 percent in the third, due in part to reductions in roaming charges in Europe.
Chief Financial Officer Nick Read said regulation would continue to weigh this year, with a drag of about 1 percentage point.
The weak point in Europe for Vodafone was its home market, where revenue fell 4.8 percent in the final quarter as it still battled to recover from the implementation of a new billing system more than a year ago.
Colao said the revenue decline was "flattening," although the market remained highly competitive.
Organic service revenue in Africa, Middle East and Asia Pacific grew 6.8 percent in the final quarter, it said.
The impact of new cut-throat competition in India with the switching on of new market entrant Reliance Jio's $20 billion network was laid bare by a 11.5 percent drop in service revenue in the final quarter.
Vodafone agreed in March to combine its operations with Idea Cellular in a $23 billion deal aimed at creating the country's biggest telecoms business. ($1 = 0.9094 euros) (Editing by Kate Holton, Greg Mahlich)