* Net debt to fall by around 1 bln sterling, or 23 percent
* To meet full-year profit expectations
* No sign of a near-term pick up in demand
* 450 more pubs added to group's "turnaround division"
* Shares rise 11 percent
(Adds FD, analyst comments, shares, detail, background)
By Mark Potter
LONDON, Aug 25 (Reuters) - Britain's biggest pubs group, Punch Taverns, has cut its debt pile by a larger-than-expected 1 billion pounds ($1.7 billion), it said on Tuesday, boosting its shares despite a tough trading outlook.
Punch, which has over 8,000 mostly leased pubs, said sales of underperforming pubs and strong cash flow had allowed it to cut borrowings by about 23 percent to a level which analysts think will be close to 3.5 billion pounds.
The group also said price cuts, promotions and new food menus would help it to meet full-year profit expectations, though it warned there was little sign of demand improving as recession-hit shoppers cut back on drinking and eating out.
Bank of America-Merrill Lynch analysts said higher than expected pub disposals and the tough trading outlook could cut profit forecasts for 2009-10.
But they said this was overshadowed by the big reduction in Punch's debts, which have been the main cause for a collapse in its share price in recent years.
Punch shares, which dropped from 1,398 pence in May 2007 to as low as 28.29 pence in January, were up 11.3 percent at 119.7 pence by 0750 GMT.
Britain's pubs have had a torrid couple of years as a smoking ban, recession, hikes in beer taxes, poor weather and cheap booze offers in supermarkets have kept drinkers at home.
This has compounded the challenge for groups like Punch Taverns and rival Enterprise Inns to pay down mountains of debt racked up during years of rapid growth via acquisitions.
TURNAROUND DIVISION
Punch, which raised 350 million pounds in a share sale in June, said the final quarter of its financial year was affected by mixed weather, with a warm June and early July boosting trade, but more recent rainy conditions hitting demand.
Finance Director Phil Dutton said business had been strongest in the southeast of England, helped by a rise in the number of Britons taking a domestic holiday this year.
Earnings before interest, tax, depreciation and amortisation (EBITDA) at leased pubs were down around 11 percent in the year ended Aug. 22, in line with previously reported levels.
Like-for-like sales at managed pubs were down 1.4 percent, with operating margins down by around 350 basis points.
"Although we anticipate that demand levels are unlikely to improve in the near term, we remain on track to meet our expectations for the financial year," Punch said in a statement.
Dutton said he was comfortable with analysts' forecasts for the firm to make profit before tax and one-off items of about 162 million pounds, down from 262 million the year before.
Seymour Pierce analysts were encouraged by the reduction in debt, which was due in part to proceeds of more than 400 million pounds from pub sales.
But they said this was still high compared to Punch's market value of about 700 million pounds and kept a "sell" rating on the shares.
Punch said it would add a further 450 pubs to its "turnaround division" for closer attention. The division originally included around 1,250 pubs, over a third of which have been sold.
Dutton declined to estimate how many more pubs would be sold, but said the group had no plans to sell its managed pubs division, Spirit.
Punch said it continued to spend about 1.6 million pounds a month on supporting tenants with, for example, rent concessions -- more than double the level last year.
That level of support was likely to continue for the foreseeable future, Dutton told reporters on a conference call. ($1=.6059 Pound) (Editing by Kate Holton and Jon Loades-Carter)