* 2013 operating cash flow seen down 12.5 pct to 7 bln euros
* France hit by price war after launch of new mobile player
* Dividend cut to 0.80 euros per share for 2012, 2013
* Predicts return to growth in 2014
* CFO says group to submit 'indicative offer' on Yoigo
PARIS, Oct 25 (Reuters) - France Telecom cut its dividend for this year and next by over 40 percent on Thursday, as it tackles tougher than expected competition in its key home market from upstart rival Free Mobile and a weaker economic outlook.
Predicting a 1 billion-euro ($1.3 billion) slump in operating cash flow next year, the owner of the Orange mobile brand said it would pay a dividend of at least 0.8 euros per share in 2012 and 2013, down from the 1.4 euros paid in 2011.
In February the company had said it would cut the dividend this year to 1.21-1.35 euros.
Renaud Murail, portfolio manager at Barclays Bourse, said the dividend cut had been expected by investors, given the harsh competitive environment.
``With the current share price, even with a dividend at 0.80 euros, the yield is 9 percent on France Telecom so it remains a dividend play,'' he said.
The prospective dividend yield for its nearest European rivals is 6.6 percent, according to Thomson Reuters data.
France Telecom shares were down 1.4 percent at 9.20 euros by 0923 GMT, off an earlier low 0f 9.03 euros, but still down by over 20 percent this year, while the Stoxx Europe 600 telecoms sector index is down 6 percent.
The cut comes as Europe's telecom operators struggle to find growth amidst intense regulatory pressures, falling prices, and changes in how consumers use their phones. Telefonica scrapped its dividend this year and halved it for 2013, while KPN and Telekom Austria also reduced theirs.
France Telecom's situation has been made tougher by the price war in its home market where new rival Iliad has taken a 5.4 percent share in the six months since it launched its Free Mobile service. Local rivals like Vivendi's SFR and Bouygues Telecom have cut jobs and launched new products to compete.
Chief Financial Official Gervais Pellissier said the French market, which accounts for about half of group revenue, would remain in painful transition through next year.
``By then 85 percent of our customers will be on contracts at the new lower price points,'' he said on a call. ``But we are confident that we can manage the period of change to get back to growth in 2014.''
Europe's fourth-biggest telecom operator predicted it would increase its operating cash flow in 2014 after the 12.5 percent fall to 7 billion euros predicted for 2013, helped by a steadier French market, cost cuts and the easing of regulatory pressures on international roaming prices.
France Telecom said it would cut costs by 800 million euros in 2014 compared with 2011 levels, helped by the retirement of older former civil servants who have been with the company since its state-owned days.
Despite the troubles ahead France Telecom posted third-quarter results in line with forecasts and managed to add 317,000 net new mobile customers.
Revenue fell 3.5 percent to 10.76 billion euros, while earnings before interest, tax, depreciation and amortisation (EBITDA) fell 7.3 percent to 3.65 billion euros.
Analysts had expected third-quarter revenue of 10.74 billion euros and EBITDA of 3.62 billion, according to a poll of 12 analysts.
Pellissier said the cash flow pressure meant France Telecom would have to be prudent on acquisitions to protect its credit rating and keep its net debt to EBITDA multiple close to two.
But he added that the group was looking at Spain's smallest mobile operator Yoigo, which is now being sold by Nordic owner Teliasonera. France Telecom's Orange brand is Spain's third-biggest operator where it competes with leader Telefonica and Vodafone.
``Yoigo would be a small acquisition ... so it is probable that we will submit an indicative offer,'' he said.
Asked if the group will also look at Vivendi's Maroc Telecom, which could cost 4.5-5.5 billion euros, he said: ``If an asset like Maroc was one day for sale, we would have to look at it even if we are already present in Morocco,'' he said.
France Telecom owns 40 percent of the kingdom's second-biggest operator Meditel.