* Says probable covenant breach at the end of Jan 2013
* Warns will not meet FY market forecasts
* Says Christmas trading has started below expectations
* Covenant will depend on remaining trade over Christmas period
* Shares down 37 pct, hit record low (Adds details, CEO, analyst comment)
LONDON, Dec 13 (Reuters) - HMV has "12 critical days" to pull in Christmas sales and help avoid a likely breach of its banking agreements at the end of January, the British entertainment retailer said.
The 91-year-old company said weak market conditions had created "material uncertainties" for the business, exacerbated by a worse than expected start to Christmas trading period in which the firm makes 60 percent of its sales for the whole year.
This would result in a probable breach at the end of January of covenants with its banks on its financial performance, it said on Thursday, also warning it was unlikely to meet analyst expectations for its full-year results, without giving further guidance.
It had been expected to post an annual pretax profit of between 7 and 10 million pounds, according to Reuters data.
Its shares lost more than a third of their value.
HMV, famous for its Nipper the dog trademark, has struggled in declining music, DVD and games markets and has been shifting its focus towards promotions and technology products like tablet PCs and headphones.
It said it was in "constructive discussions" with its eight lending banks, including keeping them informed of current trading, which it and other retailers hope will be boosted by a late surge in shopping before Christmas day.
It would not say what penalties it would face if it did breach its agreements.
"Christmas gets later every year, people are also in search of the promotional offer and being very careful about where they spend their money," Chief Executive Trevor Moore told Reuters.
"There are still 12 critically important trading days until Christmas and being on the high street (town centre), if things do come late, is absolutely to our advantage because that's where the footfall will be.
"That Friday, Saturday, Sunday and Christmas Eve will be very important for the high street and very important for HMV."
Analysts at brokerage Panmure Gordon said in a note: "It is difficult to ascribe an equity value (to HMV), given the material uncertainties. The group has a lot of support from its various stakeholders, but its markets are extremely unhelpful."
HMV's statement came as the group reported a 24.1 million pound ($39 million) operating loss for the 26 weeks to Oct. 27, an improvement on the 33.2 million pound loss posted a year ago.
The group, which has benefited from better terms with its key suppliers and from rival computer games retailer Game hitting trouble and halving its number of stores, said like-for-like retail sales in music and DVDs still fell by 16 percent despite growing its market share in all categories.
Net debt at the half-year rose to 176.1 million pounds from 163.7 million and HMV said it had begun a review of its cost base, although the closure of any of its 247 stores was not planned for the time being.
The firm has made a string of disposals to help reduce debt, selling its Waterstones's book chain last year for 53 million pounds.
This year it has sold much of its live entertainment business, disposing of a chunk including London venues such as the HMV Forum and the Jazz Cafe last week and the London Hammersmith Apollo in May.
The group is in talks to sell the G-A-Y and Heaven clubs - the remaining parts of its live business.
It said it would unveil new initiatives with its suppliers in January, but would not be drawn on specific plans.
HMV shares, which have slumped in value from a high of 282 pence set in February 2005, were down 37 percent at 2.67 pence at 0943 GMT, having hit a new low of 2.2p.
($1 = 0.6205 British pounds) (Additional reporting by Isla Binnie; Editing by David Holmes)