The Franco-American group, which posted its first profit last year since it was formed in an ill-fated 2006 merger, also confirmed its profit and cash targets for the year despite tough market conditions, especially in Europe.

"We had a slow start in a volatile environment because of lower product volumes and mix," Chief Executive Ben Verwaayen said on a conference call.

Alcatel-Lucent on Thursday posted a 12.3 percent decline in first-quarter revenue to 3.2 billion euros ($4.2 billion), in line with analysts' expectations.

Its adjusted operating loss was 221 million euros because of the slowdown and weaker gross margin, while net profit on a reported basis was 398 million euros, helped by the disposal of its Genesys business unit.

Telecom operators globally are expected to slow spending on their networks this year, hurting vendors including Ericsson and ailing Nokia Siemens Networks just as they were recovering from the last economic downturn and intense price wars.

Analysts and market forecasters predict slower growth of 3-4 percent in the market for telecom network equipment, down from 7-8 percent last year.

Market leader Ericsson beat analysts' expectations and improved its gross margins in the first quarter, leading some to hope that profitability would improve in the rest of the year.

Paul Tufano, Alcatel-Lucent's chief financial officer, also said on Thursday that the first quarter should be the low-point on margins for the year with improvements ahead.

Key to the group's profitability will be the outlook in Europe, where spending by operators fell 22 percent in the first quarter, as well as the pace of U.S. operator spending on fourth-generation mobile gear.

Such 4G gear, known as LTE, is being rolled out quickly by AT&T and Verizon this year and has lower margins than the older third-generation mobile gear, known as CDMA, which has boosted Alcatel-Lucent's margins in recent years.

The U.S. market is among the world's most profitable for telecom gear makers because low-cost Chinese players Huawei and ZTE are effectively shut out over worries about the security of key national infrastructure.

Ericsson and Alcatel-Lucent essentially split the market between them.

Nokia Siemens Networks is struggling with a broad restructuring and huge layoffs this year.

Alcatel-Lucent shares are up nearly 22 percent this year at 1.469 euros. The shares remain near five-year lows, giving the group a market capitalization of 3.4 billion euros ($4.48 billion), far from its pre-merger levels of roughly $36 billion.

($1 = 0.7585 euros)

(Reporting by Leila Abboud; Editing by James Regan)

• A Permanent Economic Emergency