UPDATE 2-Bodycote says H2 weaker than hoped, slashes payout

* Sees H2 performance modestly below its expectations

* Sees output cuts by automotive and heavy trucks clients

* Says to halve planned shareholder returns from unit sale

(Adds detail from statement, share price, broker comment)

LONDON, Nov 17 (Reuters) - Engineering group Bodycote Plc warned of a lower-than-expected second-half performance and said it was halving a planned payout to shareholders in the face of weakening demand from car and truck makers, sending its shares down more than 21 percent.

The British group said on Monday it now expected second-half constant currency revenues at its thermal processing unit to be on a par with 2007 and organic sales slightly lower, due to weaker trading in October and November and expected production cuts by automotive and heavy truck customers in December.

"As a result, performance in the second half is now expected to be modestly below management's previous expectations," Bodycote said in a trading statement. "Given the current volatility in customer demand, trading performance in 2009 will depend on the length and depth of the global economic downturn."

Bodycote, based in Cheshire in north west England, had planned to return about 260 million pounds ($387.8 million), or 80 pence per share, in cash to shareholders from the sale of its testing strategic business unit to a company formed by private equity group Clayton Dubilier & Rice, which it completed on Oct 17.

It said it was now planning to cut that to 130 million pounds, or 40 pence per share, due to "unprecedented financial market conditions" since the initial announcement of the sale, with the rest of the money used to cut its net debt.

At 1331 GMT, shares in Bodycote had fallen 26 pence per share to 97 pence.

Broker Arden Partners said it was downgrading its recommendation on Bodycote to 'neutral' from 'buy'.

"Until the markets can feel confident of bottoming out earnings in this operationally geared business, the shares are likely to drift," Arden said in a research note.

Bodycote, which heat-treats jet engine fan blades, said it was planning to widen the restructuring of its thermal processing business.

It said its aerospace, power generation and oil & gas markets remained satisfactory. Demand from European automotive and truck customers had fallen recently and was expected to stay depressed for some time, while North American automotive trading had continued to be weak.

(Reporting by Philip Waller, editing by Paul Hoskins)