MILAN, Jan 30 (Reuters) - Shares in Italian energy contractor Saipem plunged by 11% on Tuesday after damage caused by an incident involving one of its pipe-laying vessels and a decision by Saudi Aramco to drop its oil capacity expansion plans.

Aramco said it has been asked by the Saudi government to cut its planned maximum sustainable oil production capacity to 12 million barrels per day (bpd) from 13 million bpd.

Analysts said the decision could reduce demand for Saipem's services in the Middle East. In 2020 the Italian company and Aramco signed a 12-year agreement covering onshore engineering and construction activities.

Saudi Arabia represents 7% of global oil sector capital expenditure and 11% of total offshore capital expenditure to 2030, Morgan Stanley said in a report, citing data from energy think tank Rystad.

The broker said that a significant proportion of Saipem's shallow-water fleet was contracted to Aramco.

Shares in Saipem fell 11.6% to 1.34 euros by 1300 GMT, underperforming a 0.8% rise for Milan's blue-chip index .

The stock had earlier touched its lowest level since Oct. 26, dropping to 1.3355 euros on news of the incident in Australia.

Saipem confirmed that an incident on works at a pipeline managed by Australian group Woodside had involved the Saipem pipe-laying vessel Castorone but there were no injuries and no major damage to the vessel.

Woodside also confirmed there were no injuries to personnel and only localised damage to Saipem's vessel. Woodside continues to support its contractor in the ongoing trunkline installation, a Woodside spokesman said. (Reporting by Francesca Landini Additional reporting by Alessandro Parodi and Giancarlo Navach Editing by Louise Heavens and David Goodman)