The measures will throw doubt on the long-term future of the U.S. producer's embattled European operations as they struggle with high energy costs and low aluminum prices.

Ending Alcoa's primary smelting operations in Italy also should provoke stiff opposition from the country's troubled government and fiery trade unions.

The plan, part of the target announced last week to reduce output by 12 percent by the end of June, is particularly galling for the troubled Euro zone as Alcoa plows ahead with its $10 billion project in the Middle East.

Shuttering Portovesme, with a view to permanent closure, will remove 150,000 tonnes per year of capacity and account for majority of the 240,000 tonnes, or 5 percent of Alcoa's global capacity, being cut in Europe.

The remaining 90,000 tonnes will come from curtailments at La Coruña, with annual capacity of 87,000 tonnes, and Avilés, with 93,000 tonnes, both on Spain's northern coast.

This leaves the neighboring San Ciprián smelter with 228,000 tonnes per year of capacity as Alcoa's only remaining European primary smelter operating at full capacity.

The cuts in Spain are planned to be partial and temporary, but the consultation process to close Portovesme will now start.

Alcoa is likely to face strong opposition from the trade unions, which fought a ferocious but unsuccessful battle to save Alcoa's Fusina plant in 2009, and from a government struggling to save the country's troubled economy. The three plants employ about 1,500 people, Alcoa said.

"It's about time. They would have closed (Portovesme) years ago if they could have. It makes metal for a market that is totally oversupplied," said one European trader.

The future in Spain is brighter than Portovesme, which has faced possible closure for several years already.

"For Spain, it's a bit more positive. In terms of cost, Italy was the worst," said a source at Alcoa with knowledge of the plants.

BATTLING COSTS

Industry watchers were not surprised that the Italian and Spanish smelters, the highest cost in Alcoa's global asset base, would fall victim to the latest cost-cutting drive, given the industry's shift to lower cost regions such as the Middle East.

Alcoa has been battling the European Commission over the validity of its power contracts. The authorities ruled in 2009 that energy tariffs agreed with the Italian government were illegal subsidies and launched a separate probe of the company's Spanish contracts.

Alcoa has appealed that ruling, arguing that competitively priced energy, accounting for a third of production costs, is key to the survival of its European smelters.

With those tariffs in doubt, the plants' futures have also been in question, especially with expiry of the Spanish and Italian power contracts at the end of this year.

Traders expect Portovesme to be used as a bargaining chip in what could be fraught negotiations.

"There's still doubt over the power contracts. The plants are loss making. They'll be even more loss making if the subsidies are not there," said a second trader.

The fortunes of Europe's aluminum industry contrast with the Middle East, which has attracted billions in investment from the aluminum industry due to its lower-cost and plentiful supplies of power.

Alcoa is preparing to bring its greenfield 740,000 ton per year aluminum smelter, rolling mill, alumina refinery with its joint venture partner Ma'aden on line next year.

SEEKING ALTERNATIVES

Physical traders with inventory welcomed the news, noting that southern Europe will probably have to rely more on imports from Mozambique, Cameroon, Tajikistan and Russia, which could boost premiums.

There could be other opportunities because Alcoa will have to source aluminum for its European downstream operations on the open market or from its own smelters outside the euro zone, such as in Iceland and Norway.

Traders hope other producers will follow suit with drastic cuts to remove excess high-cost capacity from the market. Three-month aluminum on the London Metal Exchange closed at $2,108 per ton on Monday, up from $2,069, in line with a broader rise among base metals.

These are Alcoa's first cuts to active capacity since the global economic crisis in 2008. Last week, it said it will permanently close Alcoa, Tennessee, smelter and two potlines at its Rockdale, Texas, smelter, representing 7 percent of the company's total capacity. That capacity has been idle since 2009.

Alcoa stock rose 2.89 percent to $9.425 by the close on the New York Stock Exchange and climbed further to $9.48 in after-hours trading after the company reported higher-than-expected fourth quarter revenue and gave an positive outlook for demand, offsetting news of a loss.

(Reporting by Steve James and Josephine Mason; Editing by Marguerita Choy and David Gregorio)

By Josephine Mason and Stephen James