By Giulia Segreti

MILAN (Reuters) - Shares in Mediaset fell sharply on Thursday after French media group Vivendi took a hard line in a dispute with the Italian broadcaster over a soured pay-TV deal, raising the prospect of a long legal battle that could cloud its prospects.

Mediaset and Vivendi have been at odds since the French company, led by Vincent Bollore, backed away in July from a deal to give it full control of Mediaset's pay-TV arm Mediaset Premium, part of Vivendi's plans to create a European media giant.

Vivendi said on Wednesday it was no longer keen on finding an amicable solution to the dispute with Mediaset, which last week had asked a court to order the seizure of a 3.5 percent stake in Vivendi.

The Italian broadcaster is also suing Vivendi for damages and is asking Milan judges to enforce the pay-TV contract agreed in April.

The Milan-based group has lost 19.5 percent - or 700 million euros from its market capitalisation - since Vivendi's change of heart in July over the Premium deal.

On Thursday, its stock shed as much as 6 percent. They closed 3.4 percent lower at 2.62 euros.

"The market has already shown it does not appreciate the prospect of a long legal battle with Vivendi, which presents several elements of uncertainty, also on the balance sheets of the pay-TV group," broker ICBPI said in a report.

A decision on Mediaset's request to seize Vivendi shares is set for Nov. 8. The first hearing on the contract enforcement will be on March 21. But a final ruling, in a system which envisages up to two appeals, could take years.

The impasse is also limiting Mediaset Premium's options in terms of spending and investments.

"(Premium) is de facto paralysed," one source close to the matter said.

The company did not renew a contract to air two Disney channels after it expired in July and it is cutting spending to the minimum on its advertising campaign for the Christmas season, the source said.

"The impasse has already damaged them on the market and in the interim they will have problems with advertising and new investments, although it is hard to quantify this in numbers," a Milan-based analyst, who did not want to be named, said.

The deadlock with Vivendi also raises questions over whether Mediaset Premium will be able to bid for two soccer TV rights tenders for Italy's top Serie A league and for Europe's Champion's league which are due to be held in spring next year.

In 2014, Mediaset spent an estimated 700 million euros for the right to air Champions League soccer matches in Italy for the three seasons starting in 2015.

"The real game changer will be the TV rights tenders. Mediaset will have to prepare different scenarios, assessing the cost and benefits and deciding whether to bid or not, and for what," the analyst said.

(Editing by Jane Merriman)