UPDATE 2-Threat of Arcandor collapse rattles investors

* Fears Berlin will not step in casts cloud over retailer

* Government to decide on Arcandor's aid plea this week

* CEO says -- Berlin or bust

* Shares fall more than 25 percent (Adds SPD comments, background and detail)

FRANKFURT/BERLIN, May 25 (Reuters) - Fears that the German government will not rescue Arcandor (AROG.DE) as the retailer continued to warn of the imminent threat of insolvency sent the company's stock tumbling on Monday.

Arcandor, which has long struggled to break even, has been dragged deeper into crisis by the global recession, promting its chief executive to warn that it could go bust within weeks if it does not get more than $1 billion in state aid.

German government officials will meet this week to examine whether the owner of Thomas Cook (TCG.L) has a claim to state aid, although no final decision is expected, a government spokesman said.

Arcandor's request for state support has been sharply criticised by its main rival Metro (MEOG.DE) as well politicians, who say the retailer's problems do not stem from the financial crisis but from management mistakes.

Companies must prove that they are struggling as a result of the markets meltdown in order to tap the state bailout fund.

Germany's Social Democrats, traditionally open to signing off on state help to save jobs, this week joined their coalition partners, the Christian Democrats (CDU), in expressing scepticism over whether Arcandor should get a handout from Berlin.

Berlin's mayor, Klaus Wowereit, a leading Social Democrat, said several large German companies were trying to solve industry problems at tax payers' expense.

Fellow Social Democrat Matthias Platzeck, state premier of Brandenburg, joined the chorus, pointing out that Arcandor had management problems before the financial crisis began.

Arcandor shares fell by more than a quarter and closed down almost 20 percent at 1.77 euros, the biggest decliners by far among German mid-cap stocks .MDAXI.

INDECENT PROPSAL

Arcandor is under pressure to renew credit lines worth up to 710 million euros ($993.6 million) by June 12. Its Karstadt chain in particular has suffered as consumers turn their backs on the traditional department store. Retailer Metro has proposed that instead of state aid, Arcandor should spin off its department stores, which would then be combined with Metro's own Kaufhof chain.

The blueprint for a "German Department Store Inc" offers politicians a cheaper alternative to a state rescue.

Arcandor Chairman Friedrich-Carl Janssen has called the plan as its stands "immoral" but said he is willing to explore the idea, German weekly Der Spiegel reported. [ID:nLO147661]

"There is no private-sector solution. There is no alternative to state aid," Arcandor Chief Executive Karl-Gerhard Eick had told a newspaper.

"Without guarantees, we will have to choose a different path. Then the company is threatened with insolvency."

(Reporting by Arno Schuetze in Frankfurt and Gernot Heller in Berlin, Editing by Michael Shields and Rupert Winchester)