MILAN, May 4 (Reuters) - Telecom Italia's (TIM) core profit fell sharply in the first quarter hit by shrinking revenues in the group's competitive domestic market, where demand for connectivity weakened after a pandemic-driven surge.

TIM said domestic sales, which accounts for about 80% of group revenue, fell 7.7% to 2.85 billion euros, in line with an analyst consensus provided by the company.

Organic earnings before interest, tax, depreciation and amortization (EBITDA) after lease fell 16.3% to 1.17 in the January-March period compared with the same period the year before, also broadly in line with analyst expectations.

Organic EBITDA after lease -- TIM's main measure of profitability -- strips out one-off items and includes lease costs.

TIM stuck to a full-year forecast of a 'mid to high teens' drop in core profit after lease, after posting a 2021 net loss of 8.4 billion euros.

The debt laden former phone monopoly is working on an overhaul centered around a split of its services businesses from its wholesale network operations, after ending talks last month on a takeover approach from U.S. fund KKR.

As part of the break-up plan, TIM has started talks with state lender CDP to revive a project to combine its fixed network assets with those of broadband rival Open Fiber.

CDP owns 60% of Open Fiber and 10% of TIM. To ensure state oversight of a strategic infrastructure it would have control of any combined network entity.

TIM on Wednesday gave no update on the state of discussions with CDP after the parties missed an initial April 30 deadline for a preliminary agreement.

TIM and CDP need more time to clinch an accord, which could involve also infrastructure funds KKR and Macquarie, two people close to the matter said.

KKR holds a minority stake in TIM's grid. Macquarie is a minority investor in Open Fiber. (Reporting by Elvira Pollina; editing by Valentina Za)