BERLIN (Reuters) -ArcelorMittal, the world's second-largest steelmaker, said on Thursday it had dropped plans to convert two plants in Germany to carbon-neutral production because the country's energy costs were too high.

The decision to turn down 1.3 billion euros ($1.49 billion) of public subsidies is the latest blow to a German industrial sector that is still reeling from the blow of suddenly losing access to the Russian gas that had powered its factories for decades. It also casts doubt over the green hydrogen strategy launched by the previous government.

The government had hoped the subsidies would encourage ArcelorMittal to convert existing plants at Bremen in the north and Eisenhuettenstadt in the east to use furnaces fired with hydrogen, which can be created from renewably generated electricity.

But the steelmaker said it had decided not to go ahead with the plans because energy costs in Germany were too high and there was too much uncertainty about its future energy mix.

"The first electric arc forges are being built in countries that can offer competitive and predictable electricity provision," it said, highlighting a recent investment in an electricity-fuelled forge in nuclear-powered France.

"Electricity prices in Germany are high both by international standards and compared to neighbouring countries," it said, adding that the entire European steel industry was also suffering because consumers were importing so much rather than buying from local producers.

Germany is rapidly building out renewable electricity networks, but the transition from reliance on Russian gas has proven lengthy and economically painful, despite generous subsidies on offer to industries that rely on natural gas to switch to hydrogen in its place.

The conservative-led government that took office this year criticised the previous left-leaning government's energy strategy but has not so far spelled out a radically different approach.

"The European steel industry is under unprecedented pressure to preserve its competitiveness," said ArcelorMittal Europe head Geert van Poelvoorde. "And that's before the extra costs of decarbonisation."

He urged the European Commission to act to cap imports of certain kinds of steel into Europe, saying foreign competition was the most urgent problem the industry faced.

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(Reporting by Thomas Escritt; Editing by Jamie Freed)