WARSAW/GDANSK, July 9 (Reuters) - Polish State Assets Minister Jakub Jaworowski said on Wednesday that a government analysis had shown no economic grounds for a spin-off of coal assets from utilities, and added that a support mechanism for coal plants was needed at an EU level beyond 2028.

Polish utilities shares saw volatile trade following the announcement, initially falling sharply before reversing losses.

Poland is working to reduce its reliance on coal as renewable energy sources gain a larger share of the overall market. But it still needs a mechanism to support conventional power plants that provide electricity when intermittent renewable generation is low.

Under the government of previous Prime Minister Mateusz Morawiecki, Poland had initiated plans to create a special energy agency to take over coal assets, a move supported by the utilities.

While that plan was later scrapped, current Prime Minister Donald Tusk's government continued to analyse the spin-off option.

The ministry said in a press release that the economic assumptions for the previous coal asset plan were based on power prices from 2022, which were elevated due to the war in Ukraine.

Power prices have since more than halved, and the share of renewable power keeps rising.

Pressured by falling profits of their coal fleet, state-controlled utilities have stopped paying dividends. They are calling for a plan to help them cover the operating costs of coal plants.

The country's top utility PGE (PGE.WA), opens new tab last month said it could resume regular dividend payments faster if the issue of the profitability of coal assets is resolved.

The ministry pointed out on Wednesday that under current rules, capacity payments for high-emission energy sources would be banned from 2028.

Capacity payments are paid to energy providers based on their generating capacity, regardless of how much electricity they produce, and are meant to ensure reliable supply and encourage investment.

In the absence of capacity payments, the ministry said Poland would need additional support mechanisms to avoid a power gap from 2029 and called for the European Union to step in with a solution.

The energy index (.ENER), opens new tab dropped as much as 2.8% following the ministry's announcement, while top utility PGE (PGE.WA), opens new tab sank 5.3% before rallying to become the top gainer on the blue-chip WIG20 (.WIG20), opens new tab index.

"In my opinion, the lack of a spin-off, replaced by some form of long-term support for coal assets, was the solution the market anticipated", WOOD & Company analyst Jakub Bronicki told Reuters.

"Regarding the impact on the companies themselves, it is clear that for about a year they have been coping very well with these assets on their balance sheets", he added.