* Quarterly payout cut to 5 cents/share from 34 cents

* Sees $5 billion saved annually from dividend cut

* Sees additional $2 billion of cost reductions

* Shares rise 5.5 percent (Adds bank comment on Wachovia job losses; updates shares)

NEW YORK - Wells Fargo & Co slashed its dividend 85 percent on Friday, a widely expected move that the fourth-largest U.S. bank said will save $5 billion a year.

Wells Fargo also said it plans $2 billion in additional cost cuts in 2009, starting in the second quarter, but did not say where the cuts would come from. Spokeswoman Melissa Murray said the cuts do not include job reductions.

San Francisco-based Wells Fargo said it had strong operating results in January and February, and made $59 billion of mortgage loans in that period, up from $50 billion in the entire fourth quarter.

The bank lowered its quarterly dividend to 5 cents per share from 34 cents. The reduction follows similar cuts in the last two weeks by JPMorgan Chase & Co, PNC Financial Services Group Inc and US Bancorp.

Dozens of lenders are reducing or eliminating dividends to preserve capital to cover rising credit losses. Bank of America Corp has cut its quarterly dividend to a penny per share, while Citigroup Inc eliminated its payout.

It is necessary, given the continued deterioration in credit trends, said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis. It looks like unemployment will get worse, and the housing market is not getting better.

Analysts are concerned Wells Fargo could face higher losses than it has projected from mortgages and other debt tied to its Dec. 31 purchase of troubled lender Wachovia Corp for about $12.5 billion.

CAPITAL CUSHION

Howard Atkins, Wells Fargo's chief financial officer, said the dividend reduction will create a larger capital cushion in the near term to protect against a more adverse credit cycle if it occurs.

In a statement, he said the savings should increase Wells Fargo's ratio of tangible common equity to tangible assets, a key measure of financial strength, by four-tenths of a percentage point. The ratio was 2.86 percent at Dec. 31, below the 5 percent and higher that many analysts prefer.

Chief Executive John Stumpf said the bank will return to a more normalized dividend level as soon as practical and plans to repay the $25 billion it took from the government's Troubled Asset Relief Program at the earliest practical date.

The TARP infusion, which requires Wells Fargo to pay dividends to the government, is generating a return for the U.S. taxpayer at significant cost to the company, Stumpf said.

Wells Fargo said the integration of Wachovia is on track and it still expects $5 billion of annual cost savings, including through an unspecified number of job losses. It also said merger-related costs should be lower than forecast.

In afternoon trading, Wells Fargo shares were up 45 cents, or 5.5 percent, at $8.57. Through Thursday, they had fallen 72.5 percent this year, compared with a 57.2 percent drop in the KBW Bank Index .BKX.

Wells Fargo shares declined just 2.4 percent in 2008, while the KBW index slumped 50 percent. (Reporting by Jonathan Stempel; editing by Jeffrey Benkoe and John Wallace)

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