CIT's bonds fall on bankruptcy fears

NEW YORK (Reuters) - Embattled U.S. lender CIT's debt sold off steeply on Thursday, on escalating fears about a potential bankruptcy after the company said bailout talks with the government had ended.

The announcement late Wednesday followed last ditch talks in which U.S. Treasury officials had expressed concern about a worsening liquidity crunch at the 101-year old company, which lends to hundreds of thousands of small and mid-sized U.S. businesses.

Some analysts said the company was unlikely to get enough capital in time; a worry which pressured CIT's debt prices.

CIT's 5 percent notes due in 2014 fell to 52 cents on the dollar early on Thursday from 61.5 cents late on Wednesday, according to MarketAxess.

"The prudent course for bondholders is to brace for bankruptcy," wrote analysts at independent research firm CreditSights in a research note.

While the company has indicated it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file for bankruptcy, "we believe the figure is in the range of $4 billion to $6 billion plus, making outside capital sources shy away from such a heavy recapitalization," the CreditSights analysts wrote.

Costs to insure CIT's debt against the risk of default surged.

CIT's credit default swaps widened to about 47 percent as an upfront cost, from 34 percent late on Wednesday, according to Phoenix Partners Group data.

(Reporting by John Parry; Editing by Theodore d'Afflisio)