UPDATE 2-Stagecoach cuts dividend as UK rail business contracts

* East Coast rail contract results in 85.6 mln pound hit

* Year dividend cut to 7.7 pence per share from 11.9 pence

* Wants to bid for more UK rail contracts (Adds CEO, analyst comment)

LONDON, June 28 (Reuters) - The loss of a contract to run trains from London to Edinburgh cost Stagecoach more than 85 million pounds ($111.20 million) and the British transport company cut its dividend to reflect its smaller rail business.

Stagecoach said it was comfortable with a forecast for earnings per share to come in at 18.3 pence for the year to the end of next April. That would represent an 18 percent fall on the 22.3 pence earned in the year to April 28.

The lower earnings are caused by the reduction in size of the rail business. They also show the difficulties Stagecoach faces in growing bus passenger numbers in regional British cities and higher than expected staff costs in its London bus operations.

The British government took over running the East Coast rail route from Stagecoach this month after the company over-estimated profits.

The dividend was cut to 7.7 pence per share for the year to the end of April, down from 11.9 pence per share. That was attributed to a smaller rail business after its South West trains contract also came to an end.

Liberum analyst Gerald Khoo was not optimistic about the outlook for the dividend to be restored to former levels.

"The ability to grow the dividend will depend on restoring the bus divisions to profit growth. The current outlook in the UK remains challenging," he said.

BACK ON TRACK?

Over recent years, Britons have relied less on the bus as they shop more online and change their working patterns.

Stagecoach Chief Executive Martin Griffiths said transport companies and authorities needed to work together to reduce congestion and air pollution and that the buses would be part of the solution in the long-term.

"That's where I think the growth will come from, that's how we'll get people back on public transport," he said in an interview.

Growth could also come from Stagecoach winning new rail contracts despite the setback on the East Coast contract.

It has submitted a bid for South Eastern trains in and out of London and is shortlisted for East Midlands and West Coast franchises.

"The government sees us, I'm confident, as a very good train operator. We had one contractual issue on one rail contract, that's been disappointing...we move on," Griffiths said.

New rail contracts between the government and rail operators will be based on a different risk-sharing profile which makes failures less likely, he said.

Shares in the company traded up 0.7 percent at 135.1 pence at 1202 GMT, having earlier fallen as much as 7 percent to hit their lowest level since 2006. ($1 = 0.7642 pounds) (Reporting by Sarah Young Editing by Paul Sandle/Keith Weir)