UPDATE 3-BT lifts dividend after cost cuts drive earnings

* Dividend up 12 pct, eyes 300 mln stg share buyback

* Full-year EBITDA up 3 pct, helped by cost cutting

* Sees improving revenue trends ex-transit

* Shares down 2 pct (Adds quotes, reaction)

By Kate Holton

LONDON, May 10 (Reuters) - Britain's biggest fixed-line telecoms firm BT hiked its dividend and promised a share buyback on Thursday, as deep cost cutting and success in broadband helped it to cope with a tough trading environment better than many European peers.

Fixed-line and mobile telecoms groups across Europe are struggling with weak consumer spending, stiff competition and costly network upgrades.

Deutsche Telekom posted flat first-quarter core earnings on Thursday, while shares in Dutch group KPN hit a seven-year low this month before attracting billionaire Carlos Slim as an investor.

BT, a former state monopoly that was one of the first big privatisations of the Thatcher government in the 1980s, has been focusing on cost cutting and improving productivity in a bid to recover from profit warnings in 2008 and 2009 sparked by the poor running of its corporate Global Services division.

The group, whose competitors include Virgin Media, BSkyB and TalkTalk, said shareholders would now get their reward.

It raised its full-year dividend by 12 percent to 8.3 pence a share and pledged to increase the payout by 10-15 percent a year over the next three years. It also announced plans to buy back 300 million pounds ($483 million) of shares.

"BT provides a level of stability and security that has so far been utterly absent in the rest of the telecom sector," Bernstein analyst Robin Bienenstock said.

BT shares, up 11 percent over the past six months, slipped in early trade, however, amid some disappointment the dividend was not more generous.

The group had raised hopes of higher payouts in March when it reached a deal to pay down the 4 billion pound deficit on its staff pension fund more quickly than previously planned, resolving a long-running concern for investors.

BT shares, which have outperformed the STOXX Europe 600 telecoms index by 20 percent this year, were down 2 percent at 212.9 pence by 0900 GMT.

IMPROVING TRENDS

BT reported a 3 percent rise in earnings before interest, tax, depreciation and amortisation (EBITDA) before one-off items to 6.1 billion pounds for the year ended March 31, in line with expectations that were raised during the year.

Earnings were helped by cost cutting, as revenues fell 4 percent to 19 billion pounds, largely held back by regulatory cuts, with the group being paid less for carrying the traffic of other operators.

Excluding these so-called transit revenues, the decline in revenues was 1.9 percent, due to tough conditions in Europe and the small to medium enterprise market.

BT said it expected revenue excluding transit to show an improving trend in 2013 and 2014, and that it should grow core earnings in those financial years as well.

Tight cost control and efficiency improvements have enabled the group to invest in its infrastructure, with a fibre network now passing 10 million homes.

Chief Executive Ian Livingston said BT was also seeing good traction with its TV service BT Vision and reported strong demand for broadband, with 589,000 customers signing up for the service from BT Retail in the year, and 131,000 net additions to its superfast broadband network in the final quarter.

Full-year free cash flow was comfortably ahead of forecasts at 2.5 billion pounds.

($1 = 0.6212 British pounds) (Editing by Mark Potter)