UPDATE 1-Veolia puts UK water arm up for sale-paper

* Plans to sell 48 pct stake - paper

* Hopes to raise around 400 mln stg - paper

* To use cash to pay down debt - paper

* Veolia declines comment to Reuters

(Adds Veolia's response)

LONDON, July 5 (Reuters) - French water and environmental services company Veolia Environnement (VIE.PA: Quote, Profile, Research) has put its UK water arm up for sale to raise money to reduce its debt, The Sunday Times reported.

The company has hired Morgan Stanley and HSBC to sell a 48 percent stake in the group, which supplies water to more than 3.3 million customers in the South East of England, the newspaper said.

The Sunday Times said Veolia hoped to fetch about 400 million pounds ($656.5 million) for the holding.

A Veolia Environnement spokesperson declined to comment on the report.

($1=.6093 Pound) (Reporting by Paul Sandle and Nicolas Delame; editing by Simon Jessop)