* Cuts dividend by 71 pct to 0.10 euros a share

* Shares edge up 0.17 percent before results

MILAN, March 20 (Reuters) - Italy's biggest commercial broadcaster Mediaset SpA warned on Tuesday of a difficult year ahead after 2011 net profit fell 36 percent, dragged down by a fall in advertising sales and losses at its pay-TV operation.

The group, owned by former prime minister Silvio Berlusconi, cut its dividend by a higher-than-expected 71 percent to 0.10 euros per share, as its debt rose to about 1.8 billion euros ($2.38 billion).

"In such an uncertain period the first priority is protecting the financial solidity of the company, and we decided to pay out 50 percent of profit," Chief Financial Officer Marco Giordani said in a conference call. Mediaset has traditionally paid out all of its net profit.

"The cost-cutting programme will help us to reduce our debt by one-fourth in three years' time," he added.

Mediaset - Italy's leading advertising player, with a market share above 35 percent - predicted a lower net profit for 2012 and said the negative trend in advertising in Italy was mainly linked to cuts by Telecom Italia.

In 2011 net profit was 225 million euros, below analyst expectations for 261 million euros.

"Q4 was clearly very weak. The old pattern of Mediaset outperforming the TV market is not holding," Nomura analysts said in a note, keeping their "reduce" recommendation on the stock.

"Given the negative advertising trend, we are somewhat surprised cost-cutting has not been increased, but we suspect it will be as we go through the year."

The decline in advertising sales in the first three months of the year was in line with a drop seen in the previous quarter, Mediaset said, citing the economic downturn it its two key Italian and Spanish markets.

Giordani confirmed the group's plan to cut costs by 250 million euros by 2014 and said Mediaset was comfortable with its debt covenants and had no refinancing problems.

Its pay-TV operation, which competes against News Corp unit Sky Italia, posted a 65.8 million-euro operating loss, after an 836 million euro outlay to acquire Serie A football rights.

Mediaset earlier this month signaled plans to boost its online business through deals with global Internet players like Facebook, Microsoft Corp, Twitter and Yahoo Inc .

Shares in Mediaset closed up 0.17 percent at 2.29 euros before the results were published.

• A Permanent Economic Emergency