UPDATE 2-E.ON still sees value in Britain despite profit drop

* Lost 400,000 clients in Britain in H1

* British retail market still has prospects -CFO

* Q2 operating profit down 18% (Recasts with CFO comments, context on Britain)

By Christoph Steitz and Tom Käckenhoff

FRANKFURT/DUESSELDORF, Germany, Aug 7 (Reuters) - E.ON remains committed to the ailing British retail energy market, its chief financial officer said on Wednesday, allaying concerns the German group could pull out after prolonged profit decline.

E.ON -- one of Britain's "big six" energy providers -- lost about 400,000 clients in Britain in the first six months of the year, hit by a price cap on tariffs and cut-throat competition that has led profits to plunge by 65%.

On a group level, second quarter operating profit fell 18% to 542 million euros ($606 million), higher than the 528 million Refinitiv estimate.

"For decades, Britain stood for a reliable energy policy," E.ON's finance chief Marc Spieker told journalists after presenting first-half results. "For about two years we've been seeing the exact opposite."

In a sign of continuing regulatory pressure, Britain's energy watchdog Ofgem on Wednesday said suppliers would need to cut their bills by 6% from Oct. 1, following a drop in wholesale gas and power prices this year.

But Spieker said the market still had good prospects, saying it needed to recover over the medium-term as regulators in Britain, currently in the process of exiting the European Union, realise that the current framework does not work.

He said that customer numbers had shown a slight improvement in July and the first week of August, without going into details.

E.ON, which has around 12% of the British market https://www.ofgem.gov.uk/data-portal/electricity-supply-market-shares-company-domestic-gb, still expects to turn a profit in Britain this year, unlike Npower, the smaller local unit of rival Innogy.

Under an asset swap deal, loss-making Npower is expected to end up in E.ON's ownership as early as next month, which could make Britain an even bigger challenge for the energy group.

Asked about Npower's future, Spieker said that E.ON would not tolerate a business that remained in the red in the long-term, indicating Npower faces another round of restructuring or cost cuts.

E.ON and Npower are two of Britain's main energy suppliers alongside Centrica's British Gas, SSE, Iberdrola's Scottish Power, and EDF Energy.

E.ON shares were 0.34 lower at 0945 GMT.

"We think it is more important that E.ON confirmed the synergy target for the Innogy deal," said Thomas Deser, senior portfolio manager at Union Investment, a top 20 shareholder in E.ON.

"The closing ... is the actual driver of E.ON's equity story."

Spieker said that the transaction, under which it will acquire Innogy's retail and networks activities, would result in annual synergies of 600-800 million euros. As part of the deal, Innogy parent RWE, will get the renewable activities from both E.ON and Innogy. ($1 = 0.8941 euros) (Additional reporting by Nina Chestney in London; Editing by Michelle Martin and Keith Weir)