By Aasa Christine Stoltz

OSLO (Reuters) - Europe's largest maker of newsprint, Norske Skog (NSG.OL: Quote, Profile, Research), must reduce a $3 billion debt mountain to restore its appeal after agreeing this week to cut capacity to counteract weak global paper markets.

With the newsprint market in a slump, energy costs soaring along with concern about its debt, Norske Skog's stock has tumbled 80 percent in the past year. The company now trades at a "bankruptcy valuation" of 20 percent of its book value.

That may be unfair, say analysts, given Norske Skog's relatively lower debt burden than its peers and some prospects for the newsprint market to recover from 2009.

On Wednesday, Norske Skog's board muscled past shareholders and employees a 7 percent cut in capacity, including a contested shutdown of a machine at a politically-sensitive Norwegian mill.

"This is just a small step forward," analyst Per Haagensen at Fondsfinans said. "This is not where the big battle is -- that is reducing its debt."

Norske Skog, whose market value has nose-dived to about $700 million from around $4 billion a year ago, has repeatedly said it does not have problems meeting its current debt obligations.

It is scheduled to pay back 2.6 billion crowns ($511.9 million) in 2008 and 2009 and a whopping 8 billion crowns in 2010 and 2011 combined.

Analysts say Norske Skog has enough cashflow to pay its debt this year and next, but that the sums for 2010-2011 are potentially big enough to force further restructuring.