(Adds details, background)
MADRID, April 29 (Reuters) - Spain's Telefonica reported on Friday a 6.7 percent drop in first-quarter core profits to 3.376 billion euros ($3.85 billion), broadly in line with forecasts as lower currencies in key overseas markets more than offset slight growth in underlying revenue.
But investors are now more focused on the steps the Spanish group may soon take to cut debt and appease ratings agencies if the EU blocks the sale of its British unit O2 to the owner of its rival Three UK, CK Hutchison Holdings.
It said its debt stood at 50.2 billion euros at the end of March, up from 49.9 billion euros at the end of December and confirmed it would pay a 0.75 euro per share dividend against 2016 results although it stopped short of saying it would be paid fully in cash if the O2 sale went through.
A source familiar with the matter said earlier this month that a wide range of options were being looked at in order to provide enough breathing space for Telefonica to review its options for O2.
The first-quarter results showed signs of progress in Telfonica's avowed strategy of concentrating on fewer, stronger businesses worldwide and investing in high speed internet connections and premium television content.
Underlying revenues rose by 3.4 percent to 10.784 billion euros as activity in Spain picked up, while core operating income before depreciation and amortisation (OIBDA) would have increased by 5.5 percent rather than dropped by 6.7 percent if it had not been for lower Latin American currencies and changes in the group's measures which made the comparison with last year less favourable.
Both revenues and core profits fell just short of analysts' forecasts, with OIBDA expected to have come in at 3.4 billion euros on revenue of 10.9 billion euros.
Margins were stable on the quarter, with a 3 percentage point increase in Brazil making up for a 4 percentage point fall in Spain, where Telefonica continued to offer discounts on its main television packages in a bid to increase its customer base. ($1 = 0.8776 euros) (Reporting by Julien Toyer; Editing by Paul Day, Greg Mahlich)