UPDATE 2-Total ups dividend to put leaks in the past

* Raises quarterly dividend by 3.5 pct to 0.59 eur/share

* Hydrocarbon production down 2 pct

* Does not confirm average annual production growth target

* Shares rise over 3 pct, outperform sector

* Confident for H2; Elgin seen back on stream by year-end

* Takes charge for U.S. Iran corruption probe

By Caroline Jacobs

PARIS, July 27 (Reuters) - Total SA raised its dividend on Friday for the first time since 2008, betting that its cash pile and pipeline of new oil and gas projects will support the payout in future.

Western Europe's number three oil company also pointed to improving European refinery margins as it reported flat profit for a second quarter that was dogged by gas leaks in the North Sea and in Nigeria as well as attacks on a pipeline in Yemen.

Total said it was still hoping the Elgin platform where the North Sea leak happened would be back in action by the end of this year.

Total increased its quarterly dividend by 3.5 percent from the previous quarter to 0.59 euros ($0.73) a share, to the surprise of analysts unaccustomed to seeing payout changes from the company part-way through the year.

Some on a conference call questioned whether Total had the cash flow to support a higher payout, but Finance Director Patrick de La Chevardière insisted it was sustainable and "in line with our policy of paying out 50 percent (of earnings) over time".

Total's had left the door open to hiking its annual payout of 2.28 euros, saying in April that it first needed time to control the Elgin leak, which it stopped earlier this year.

Total shares closed up 3.7 percent higher at 37.46 euros, outperforming the European sector, which was 1.26 percent higher.

Still, lower oil prices, down 9 percent at $108.3 a barrel compared with the previous quarter and 7 percent lower from the same quarter in 2011, led to a 2 percent drop in Total's adjusted operating income to 5.79 billion euros.

Weaker global oil prices have weighed on the sector's earnings, falling from a record of about $128 a barrel, with tension easing between Iran and the West, OPEC output climbing and concerns mounting about the euro zone debt crisis.

Total's quarterly output fell 2 percent to 2.261 million barrels of oil a day compared with the same period in 2011 due to the shutdown of the Elgin platform, damage to Total's Yemen LNG pipeline from repeated Islamist militant attacks and a gas leak at the OML 58 block in Nigeria.

The Nigeria leak was plugged in May and the Yemen pipeline came back on stream the same month.

Total did not confirm its annual average production target of 2.5 percent growth through 2015 at $100 a barrel of oil. Officials said there would be more details on its targets at an investor day in September.

New projects, including Bongkot South in the Gulf of Thailand, added 4.5 percent to output, Total said.

Total took a 316 million euro charge linked to an investigation regarding gas contracts with Iran in the 1990s. It said progress had been made in discussions with the U.S. Justice Department and the Securities and Exchange Commission.

The company and its chief executive Christophe de Margerie still face a French investigation into the same affair. Net income in the quarter, excluding one-offs and unrealised gains or losses related to changes in the value of fuel inventories, was 2.9 billion euros ($3.57 billion), up 2 percent and compared with an average forecast of 2.86 billion.

Sources told Reuters this week that Total was in the early stages of preparing the sale of its TIGF gas pipeline business which could raise about 2.8 billion euros ($3.4 billion).

Finance director Patrick de La Chevardiere said there was "no process at this stage with regard to that asset" and declined to comment further.