Lucchini steel output falls to 65 pct of capacity

* Europe's steel demand outlook poor, no improvement in sight

* Raw material costs high, customers liquidity level low-source

* EU steelmakers cut production on sluggish demand

LONDON, Jan 20 (Reuters) - Russian steelmaker Severstal's Italian affiliate Lucchini is producing steel at about 65 percent of its capacity, down from 80 percent a year ago, due to weakening demand, a source at the company said.

"Things are not looking too good in Europe," the source said.

"The outlook is pretty negative: raw materials prices are still too high and clients have no liquidity," the source added.

A Lucchini spokesman could not immediately be reached to comment on Friday.

Lucchini is among a number of European companies that have been forced to cut capacity due to sluggish demand and a deteriorating economic outlook.