* To raise 200 mln stg from investors
* Cuts earnings outlook, dividend
* Q3 customers up, will rise again in Q4
* Shares down 10 pct (Adds exec chairman, CEO comments, shares)
LONDON, Feb 8 (Reuters) - TalkTalk asked investors on Thursday for 200 million pounds ($278 million) to help fund a plan to connect three million British homes and businesses with ultrafast broadband and keep it competitive with bigger rivals.
The British firm said it had provisionally agreed to set up an independent company with M&G Prudential to build the network, with a combined potential equity investment of up to 500 million pounds and borrowing of around 1 billion pounds.
But TalkTalk also cut its full-year earnings forecast and said it would slash its dividend to help fund the new network and rebuild its customer base, sending its shares down more than 10 percent.
"TalkTalk's announcement is a major rolling of the dice to turn around the fortunes of a company dogged by profits warnings and underperformance versus larger peers," said Henry Croft, research analyst at Accendo Markets.
Charles Dunstone, the founder of the smaller rival to BT , Sky and Virgin Media, said the plan would put TalkTalk "at the heart of Britain's fibre future".
M&G's infrastructure equity investment arm Infracapital will contribute 80 percent of the funding and TalkTalk 20 percent. TalkTalk will initially invest 100 million pounds into the project over five years.
Britain's broadband providers had been slow to commit to the "gold standard" of full fibre to the premises (FTTP). But the government and the regulator has adopted a "fibre first" strategy in the last year or so, which is starting to deliver.
BT, the owner of the biggest network, said last week it would connect three million homes and business with FTTP by the end of 2020, while Vodafone is partnering CityFibre to connect another five million by 2025.
TalkTalk said its five-year project would target mid-sized cities and towns, such as York, the northern English city where it has built its first network.
Dunstone said its plan would complement BT's focus on large cities. "The telecoms industry collectively has a very big job to do in upgrading broadband to provide the service people need in a modern economy," he said.
Britain's Digital Minister Matt Hancock welcomed the move, saying: "It's fantastic to see TalkTalk stepping up to the plate."
Dunstone, along with CEO Tristia Harrison, has been "resetting" TalkTalk since he returned to a hands-on role nine months ago. He is positioning it firmly in the value end of the market with long-term fixed-price plans and has stepped back from services like mobile.
The strategy is attracting new customers - Dunstone's priority - but coming at a cost to earnings.
The company added 37,000 customers in its third quarter, and forecast additions of 150,000 to 160,000 in the full year.
"We have really got the growth going, the growth has accelerated again this quarter and we think this quarter (Q4) is significantly bigger," Dunstone said
He said the fundraising and dividend cut would answer long-running questions about the company's balance sheet.
"When we get to two times EBITDA (earnings before interest, tax, depreciation and amortization) cover to debt we'd look to normalise the dividend again, an estimate would be perhaps two to three years time," he said.
TalkTalk shares, which have fallen 29 percent in the last 12 months, were down 10 percent at 108 pence in late-morning trade.
The company said it now expected full-year core earnings to come in between 230 million and 245 million pounds, down from its previous forecast of 270-300 million.
It said it would temporarily reduce its full-year dividend to 2.5 pence. It paid 10.29 pence for its last financial year.
Barclays and Deutsche Bank are acting as joint global co-ordinators and joint bookrunners for the placing of new shares.
($1 = 0.7196 pounds) (Editing by Guy Faulconbridge and Mark Potter)