* Lowers profit outlook
* Says low inflation limiting tariff increases
* Municipalities weighing making services public (Adds share fall, CFO comment)
By Geert De Clercq
PARIS, Feb 23 (Reuters) - Veolia on Thursday warned it would take a year longer than expected to achieve its core earnings target, sending shares in the French water and waste firm 7 percent lower.
CEO Antoine Frerot said challenges this year would include low inflation in Europe capping water tariff increases and the threat of municipal customers returning to public water services or considering doing so.
The city of Vilnius, Lithuania is set to end its contract with Veolia this year, while Sheffield in Britain is also considering taking back public control, he said.
A bigger threat could be the loss of the contract with the Ile de France region around Paris, under which Veolia provides water for about 4.5 million people in some 150 municipalities. It will be up for renegotiation in four years.
Paris itself has ended its outsourcing contracts with Veolia and Suez and in 2010 started running its own water service, setting an example for other places to either make water management public again or put pressure on their suppliers.
Veolia lowered its outlook for earnings before interest, tax, depreciation and amortisation (EBITDA) to a range of 3.3 billion to 3.5 billion euros ($3.69 billion) in 2019.
It had earlier forecast hitting 3.5 billion euros in EBITDA by 2018.
For 2016, it reported EBITDA up 2 percent to 3.06 billion euros on revenue down 2.3 percent to 24.39 billion euros.
“Cost cuts were the main driver of the earnings improvement and compensate the headwinds linked to the lack of inflation and the tensions on our tariffs in certain markets,” Chief Financial Officer Philippe Capron told analysts.
Veolia said it would raise cost cuts to bring the 2016-18 total to 800 million euros from 600 million.
It proposed lifting its dividend to 80 cents per share from 73 cents but did not repeat its forecast for 10 percent dividend growth in 2016-18.
Frerot said dividend in coming years would move in line with core earnings.
He said 2017 earnings growth would be driven mainly by Asia, North and South America, while in Europe growth would be moderate and in France it would be flat to slightly lower.
Asked about a possible merger with its main competitor Suez, Frerot said there were no plans for an alliance.
Frerot told analysts that he had looked at assets put up for sale by U.S. industrial conglomerate General Electric, but had decided not to make an offer.
French daily Le Figaro reported on Wednesday that Suez is in the running to buy the water business GE has put up for sale and that the firm is among a handful of other companies, mostly private equity firms, left in the running after a second round of bidding for GE Water & Process Technologies.
Suez declined to comment.
Frerot also said an audit into conflicts of interest at its French water unit had been completed and would be made public in coming weeks.
$1 = 0.9482 euros Reporting by Geert De Clercq; editing by Susan Thomas and Jason Neely