UPDATE 1-Walgreen delays withdrawal from Wash State Medicaid

* To continue filling prescriptions until March 15

* Says talks continue with Washington state

NEW YORK Feb 12 (Reuters) - Walgreen Co (WAG.N), the largest U.S. drugstore chain, said on Friday it is delaying until at least March 15 its withdrawal from the Medicaid program in Washington state because of constructive talks with the state.

Last month, Walgreen had said that as of Feb. 15, it would stop filling Medicaid prescriptions at 64 of its 121 Walgreens pharmacies in Washington State, citing continued reductions in the state's reimbursement.

Medicaid, which provides health insurance to the impoverished, elderly and disabled, is funded jointly by states and the federal government.

State-run Medicaid systems have been hurt by soaring healthcare costs and a recession that left states struggling to balance their budgets.

"We're optimistic that our continued talks will result in a solution that will provide the savings the state is looking for, while allowing pharmacies to maintain service for those patients with the most need and the fewest options," said Walgreen's Senior Vice President of Pharmacy Kermit Crawford in a statement.

In June 2009, Walgreen warned it would pull out of Delaware's Medicaid program. That state later agreed to some changes in reimbursement rates.

Major chains whose profits could be squeezed by low payments also include CVS Caremark Corp (CVS.N) and Rite Aid Corp (RAD.N).

(Reporting by Phil Wahba; editing by Gunna Dickson)