An XMM-Newton observation of the luminous Seyfert 1 galaxy 1H 0419-577 in September 2002, when the source was in an extreme low-flux state, found a very hard X-ray spectrum at 1-10 keV with a strong soft excess below ~1 keV. Comparison with an earlier XMM-Newton observation when 1H 0419-577 was `X-ray bright indicated the dominant spectral variability was due to a steep power law or cool Comptonised thermal emission. Four further XMM-Newton observations, with 1H 0419-577 in intermediate flux states, now support that conclusion, while we also find the variable emission component in intermediate state difference spectra to be strongly modified by absorption in low ionisation matter. The variable `soft excess then appears to be an artefact of absorption of the underlying continuum while the `core soft emission can be attributed to recombination in an extended region of more highly ionised gas. We note the wider implications of finding substantial cold dense matter overlying (or embedded in) the X-ray continuum source in a luminous Seyfert 1 galaxy.
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