UPDATE 1-Moody's tumbles after Buffett cuts stake

* Berkshire cuts Moody's stake to 16.98 pct

* Moody's shares down as much as 10.6 pct

* Berkshire's Goldman Sachs investment has $2 bln profit (Updates Moody's shares, adds Goldman investment)

By Jonathan Stempel

NEW YORK, July 23 (Reuters) - Moody's Corp (MCO.N) shares tumbled after Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) lowered its stake, a sign of waning support for the embattled credit rating company by its largest and most prominent investor.

Berkshire sold 7.99 million shares of the parent of Moody's Investors Service for $217.6 million, or an average $27.25 per share, on the open market this week, according to a U.S. regulatory filing late Wednesday.

The sale lowered Berkshire's stake in New York-based Moody's to 40 million shares, or 16.98 percent, from 48 million shares, or 20.37 percent. Berkshire had not bought or sold any Moody's shares since first revealing its stake in 2000.

Many investors and lawmakers blame Moody's, McGraw-Hill Cos Inc's (MHP.N) Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings for igniting the credit crisis by assigning top ratings to risky mortgages that later collapsed. They say the agencies lack independence because issuers pay for ratings.

"Credit rating agencies are creatures of confidence, and investor sentiment means a lot," said Bill Bergman, an analyst at Morningstar Inc in Chicago and a former Federal Reserve economist. "There's a great deal of intellectual talent at Moody's, but Moody's faces more competition, regulatory risks and costs. Fifty percent margins are a thing of the past."

In afternoon trading, Moody's shares were down $1.17, or 4.4 percent, to $25.35, after earlier falling as much as 10.6 percent. William Blair & Co analyst William Neff downgraded Moody's to "market perform" from "outperform."

Class "A" shares of Berkshire traded up $965 at $92,965.

Berkshire did not return a request for comment. Moody's spokesman Michael Adler declined to comment.

MOODY'S ERRORS NOT UNIQUE, BUFFETT SAYS

Berkshire revealed the Moody's share sale a day after the Obama administration proposed new conflict-of-interest and disclosure rules for rating agencies, and three months after Moody's stripped Berkshire of its own "Aaa" credit rating.

Buffett has said he does not rely on credit ratings to make his investment decisions but has long defended Omaha, Nebraska-based Berkshire's investment in Moody's.

"I don't think they were unique in being unable to spot what was coming," Buffett said on May 2 at Berkshire's annual meeting. He called rating debt a "pretty good business" because there are few competitors, but said the market disruptions will reduce revenue from some capital markets for a long time.

Moody's earnings have fallen for seven straight quarters.

According to the SEC filing, Berkshire's National Indemnity Co insurance unit still owned 24.29 million Moody's shares, or 10.31 percent, after this week's sale. Berkshire's Geico auto insurance unit owned 15.72 million shares, or 6.67 percent.

GOLDMAN SACHS INVESTMENT FARING WELL

It is common for investors to buy and sell shares in mimicry of the 78-year-old Buffett, the world's second-richest person and perhaps its most revered investor.

Berkshire paid $499 million for its Moody's stake, and on paper its investment has more than doubled in value.

The 48 million share stake was worth $3.65 billion when Moody's shares peaked at $76.09 in February 2007.

Berkshire has revealed a stake larger than 20 percent in at least one other publicly-traded company, the railroad operator Burlington Northern Santa Fe Corp BNI.N.

Another Berkshire investment, warrants to buy $5 billion of Goldman Sachs Group Inc (GS.N) stock, is faring well, having this week for the first time posted a $2 billion paper profit.

Buffett got the warrants in September when he bought $5 billion of Goldman preferred shares. The warrants let Berkshire buy Goldman common shares at $115 each.

The common shares fell below $48 in November, but this week topped $160, a level last seen just before Lehman Brothers Holdings Inc LEHMQ.PK went bankrupt in September. (Reporting by Jonathan Stempel; editing by John Wallace and Gerald E. McCormick)