UPDATE 1-Continental cap hike causes Schaeffler H1 net loss

* H1 net loss 260 mln eur after 396 mln eur one-off charge

* Net debt 5.93 bln eur at end-June vs 6.13 bln at end-Dec

* Net debt 3.5 times EBITDA or double its equity capital

* H1 free cash flow 336 mln eur vs -46 mln eur adj yr-ago

* Continental shares up 1.8 pct

(Adds management quotes, details)

By Christiaan Hetzner

MUNICH, Sept 1 (Reuters) - Auto parts supplier Schaeffler pledged to lower its sky-high debt that threatens a merger with Continental AG (CONG.DE) after posting first-half results battered by writedowns on the value of its Continental stake.

Schaeffler controls just over three-quarters of tyre and brakes maker Continental, so its ability to cut debt is a key concern for credit rating agencies judging Continental's default risk ahead of a planned junk bond issue. [ID:nWEA6314]

Schaeffler intends to merge its business with Continental, which it acquired via a leveraged takeover last year, but Chief Executive Juergen Geissinger on Wednesday backed away from committing to a deal any time soon.

"Naturally, we want a merger of the two companies, but at the moment we have the time to think about how that may in fact look at some point in the future," Geissinger told reporters.

"All the questions that certainly must be considered and illuminated have not been discussed, so unfortunately I cannot give any answers yet."

Geissinger's hands are still somewhat tied for now.

The two German companies were at odds for months, and any major move has to be approved by five banks that loaned privately held Schaeffler 12 billion euros ($15.2 billion).

Schaeffler, based in sleepy Herzogenaurach, published its first earnings report ever on Wednesday.

But management declined to discuss the financial health of its holding company, which has a further 5 billion euros in debt in addition to the liabilities at the operating company.

The balance sheet of Schaeffler alone improved by the end of June thanks to a sharp recovery in the auto parts industry this year from the depths of the global economic crisis.

Its leverage ratio dropped to a more manageable level and free cash flow reached almost 340 million euros in the half. Schaeffler had burned through cash a year earlier even before spending billions for the Continental stake in January 2009.

RATING AGENCIES WARY

"Our financing situation has eased significantly in the first half. We will further reduce our net financial debt in the coming few years. De-leveraging is a key priority for us," finance chief Klaus Rosenfeld said.

Schaeffler dramatically improved earnings at the operating level but took a near-400 million euro loss on paper related to a capital increase at Continental.

Continental this year sold shares to investors at a price well below what Schaeffler had paid for its stock. That forced Schaeffler to write down the value of the shares in its books.

Now the book value is about 63 euros a share, still well above the stock's current price of 48.565 euros by 1330 GMT, up 1.8 percent after having gained more than 30 percent this year.

On the eve of the Lehman Brothers collapse in 2008, Schaeffler launched a hostile takeover bid for Continental that valued its three-times-larger rival at 75 euros per share. It had borrowed billions for the deal from a handful of banks led by the later partly nationalised Royal Bank of Scotland (RBS.L).

Engulfed by the financial crisis, Continental shares plunged to around 10 euros while liquidity and funding dried up. (Editing by Michael Shields)