Fears that US retail giant Kmart is in the kind of trouble that can lead to bankruptcy have deepened as brokers and analysts back away from the company.

The fears were exemplified on Friday in the stock markets, where Kmart shares slumped more than 20% to their lowest level since 1968.

The retailer was already in trouble in the first few days of the year, after Prudential Securities advised its clients to sell the stock. "Sell" ratings are much rarer in the US than in the UK.

Junk

But a trading update on Thursday admitting that the company is looking for extra financing and reviewing its current business plan has encouraged other observers to follow suit.

Christmas trading was down 1% on last year and overall performance for the last three months of 2001 would be well below expectations, it admitted.

And on Friday, Kmart's debt was relegated to "junk" status by rating agency Moody's, making borrowing further money a much more expensive proposition - although the company can still probably obtain a short term line of rescue credit from its lenders.

The result was existing debt slumped in value by as much as 20%: a level seen by brokers as "distressed".

"I believe bond prices have embedded in them an expectation of a possible bankruptcy in the short term," Robert Goch, a senior vice president at Miller Tabak Roberts Securities in New York, told Reuters.

Kmart is seen as falling behind its competitors such as the Walmart and Target chains, with outdated stores and poor support and logistics systems leading to weaker customer service.