* Policy switch follows EU-wide trend
* Government tries to protect purchasing power
* Related graphic: http://link.reuters.com/sed47t (Adds market closing price and volume)
By Geert De Clercq
PARIS, June 19 (Reuters) - State-controlled French utility EDF lost more than $5 billion of its stock market value on Thursday as the Socialist government scrapped a planned increase in electricity prices to protect consumers.
Energy Minister Segolene Royal told a morning TV show she had cancelled a 5 percent rise in regulated tariffs, set to take effect on Aug. 1, which had been decided by the previous government of Jean-Marc Ayrault.
Royal, a powerful Socialist politician who lost a presidential election to conservative Nicolas Sarkozy in 2007, was appointed energy minister in the new government of Prime Minister Manuel Valls in early April and immediately began talking about lowering energy costs.
The tariff review is part of a Europe-wide trend to cap energy prices as governments try to bolster consumer spending in the face of stubbornly high unemployment.
French President Francois Hollande is struggling at record lows in opinion polls, and his Socialist party took a drubbing in recent European and municipal elections.
Royal, Hollande's former partner and mother of his four children, had already scrapped a planned tax on truck traffic. Earlier this week she presented a new energy law that aims to boost France's use of renewables but did little to implement Hollande's promise to reduce reliance on nuclear energy.
"A 5 percent tariff increase had been set for Aug. 1. The bills will not increase," Royal told BFM television, adding that new tariffs for Jan. 1 would be announced in October.
"I will make the calculation with energy regulator CRE, an independent authority, which will work out the increase or maybe a fall, based on the reform I have put in place," she added.
At the energy ministry, officials could not be reached for comment.
Shares of EDF, which is 85 percent state-owned, fell as much as 11 percent, their biggest slide since their 2005 stock market listing. They later recovered to close down 7.7 percent - their biggest fall since August 2011.
Nearly 11 million shares traded, the biggest trading volume since December 2006. At the Wednesday close, EDF had a market cap of $67.14 billion.
"The market is edgy because these comments are considered as inconsistent with communication to date and undermine the confidence in the regulatory visibility on EDF, which should be entitled to cover its costs," Societe Generale (Paris: FR0000130809 - news) analyst Vincent Ayral said.
EDF shares are highly sensitive to tariff moves.
They jumped as much as 10 percent on July 9, 2013, when the Ayrault government announced a 5 percent increase in electricity tariffs for the summer of 2013 and a second increase for the summer of 2014, in a bid to help EDF meet its costs.
Those tariff hikes were the biggest in at least a decade, and EDF shares doubled between March 2013 and March 2014 as the market anticipated their impact on its profits. The shares had been on a downtrend since early April this year and were down 7 percent over the past three months based on Wednesday's close.
French consumers association UFC-Que Choisir welcomed Royal's decision to scrap the planned hike but urged her to come up with a new legal framework to set power prices and prevent legal challenges.
Smaller competitors of EDF and gas utility GDF Suez (TLO: GAZ-U.TI - news) have successfully challenged government price caps on energy in court, arguing they created artificially low prices that did not cover utilities' production costs and prevented smaller competitors from winning market share from the big two.
Royal's comments follow a Europe-wide trend to cap power prices and mark a sharp reversal in government policy.
Thanks to the 2013 tariff hike and despite a warm winter, EDF in February posted a 4.8 percent rise in core earnings in a rare show of strength among Europe's struggling utilities.
Other European utilities such as Iberdrola (Other OTC: IBDRY - news) , Endesa (TLO: ELE-U.TI - news) and Enel (Milan: ENEL.MI - news) face similar pressures. Spain is overhauling its energy sector by introducing a new power generation tax and cuts to renewable energy subsidies, while Italy's government advocates a cut in network costs as part of a drive to reduce energy bills.
In Britain, power prices have risen to the top of the political agenda following opposition leader Ed Miliband's pledge in September to freeze bills for 20 months if he wins the 2015 election. ($1 = 0.7368 Euros) ($1 = 0.7336 Euros) (With reporting by Marion Douet; Editing by James Macharia and Jane Baird)