* Says encouraged by indications of oil-prone rocks
* Starts drilling another well on Napariaq block
* Sees farm-out deal funding Greenland exploration next year
* Confident hyrdrocarbons will be discovered off Greenland
* Shares down 5.4 pct (Adds deputy CEO comments, updates shares)
By Sarah Young
LONDON, Aug 3 (Reuters) - British oil explorer Cairn Energy said it found no oil in a well off the coast of Greenland, denting investor and industry hopes that a new multibillion barrel basin is waiting to be found just inside the Arctic circle.
The company, whose focus on Greenland has intensified since a deal to reduce its stake in its Indian unit, said on Wednesday that despite the fact that the LF7-1 well did not find oil, indications of oil-prone rocks were encouraging.
Cairn will spend $600 million this year drilling a total of four wells in its attempt to open up a new oil province in the little-explored Arctic territory.
Bigger rivals such as Exxon Mobil , the world's largest non-government-controlled oil company by market capitalisation, have also acquired exploration acreage in Greenland and are waiting to drill.
Shares in the company traded down 5.4 percent at 333.9 pence at 0947 GMT, paring earlier losses of as much as 6 percent as they hit their lowest level for 18 months, and underperforming the European index of oil and gas stocks , which was 1.8 percent lower.
"It's a binary game; you either have success or you don't, and at the moment, they're not having success, and that's being discounted into the share price," said Investec analyst Angus McPhail, describing Cairn's strategy as a "one gun-shot approach in one region".
Rival oil firm Tullow Oil , for example, is undertaking exploration across a number of different regions, while Cairn is chiefly focused on Greenland.
McPhail said it was still early days for Cairn in Greenland, and added up to 20 wells could be needed to find oil.
"These are pin pricks in big areas," was how deputy chief executive Mike Watts described each well being drilled in Greenland.
"Everything we're doing is in the country Greenland, but I can't stress enough (that these are) separate basins, and each one we've drilled has been the first well in the basin."
By the end of this drilling period, Cairn will have spent just over $1 billion on exploring Greenland, said Watts, adding that it did not plan to spend any further money on the Arctic as it hopes to be carried by future partners.
"Further activity in Greenland, we hope to fund from farm-outs as they come next year," said Watts.
"We're building an inventory of data second to none in the industry, and when we put it all together I am sure we'll have something appealing for players next year."
As well as Exxon, U.S.-based ConocoPhillips and Chevron and Europe's biggest oil company Royal Dutch Shell RDSa.L also own acreage in Greenland and could all be possible partners for Cairn.
Watts said he remained confident on Greenland's potential as a future oil province despite the setback on the LF7-1 well.
"We may not be lucky, and it may be the next round of operators that do the drilling, but I think somebody will be finding commercial amounts of hydrocarbons off the coast of Greenland."
Cairn said it had started drilling another well, the Delta-1 well on the Napariaq block, which is located 110 kilometres away from a well it drilled in 2010 and which had oil and gas shows.
Cairn must complete the drilling of all four wells during a narrow summer window for operations which closes in October when icy weather sets in.
Exploration in the region has sparked protests from environmental groups who object to drilling for oil in the pristine Arctic, and Cairn has had its activities interrupted by protesters numerous times. (Additional reporting by Tom Bergin; Editing by Rhys Jones and Will Waterman)