* Analysts say company underestimated project costs
* Profit warning adds to uncertainty over Algeria probe
* Market watchdog to investigate Saipem price movements
MILAN, Jan 31 (Reuters) - Well before a profit warning wiped $6 billion off Saipem SpA's stock market value, investors were cutting their exposure to Europe's biggest oil services provider.
Unnerved by a corruption probe in Algeria and worried that a new management team appointed last month might unearth more bad news, some long-standing shareholders had decided the company's dull-but-reliable label no longer applied.
But even those reduced expectations did not prepare them for what followed on Tuesday - the discovery that a swathe of Saipem's bread-and-butter contracts was far less lucrative than previously believed.
There was no revelation of a drastic project overrun, no one-off cost for a drilling mistake. Instead, Saipem's entire accounting was in question after it badly overestimated how much the work in its backlog would cost.
One senior fund manager and Saipem shareholder said the fund had decided after Saipem Chief Executive Pietro Franco Tali quit in December that the company was a poor prospect, and began reducing its stake.
The fund manager, who asked not to be named, said it had not managed to unload the stock entirely from its portfolios before Tuesday, when Saipem - a company that should be riding high on strong oil prices - issued a profit warning on 2012 results.
It said profits in 2013 would fall 80 percent because of lower margins on new contracts and fewer existing high-margin contracts.
HSBC called it a bombshell that would lose Saipem its "no sleepless nights for investors" tag.
"So what's gone wrong?" it asked in a note. "Saipem said there were no significant contract overruns, delays in its current portfolio - no "black hole" as such - simply a lower-quality workload."
Mediobanca analysts said the profit drop could only be explained by more conservative accounting and that the cost of projects already under way must have been heavily understimated.
"What on earth was the old management doing?" asked a second fund manager on Thursday.
Saipem is 43 percent owned by Italy's flagship oil group Eni . Shares in Saipem have lost about 40 percent of their value since the Algeria corruption probe came to light in December, when former Eni manager Umberto Vergine was brought in to steady the ship.
The Algeria investigation also led Eni's Chief Financial Officer Alessandro Bernini, who had been Saipem CFO until 2008, to quit.
Eni said Saipem's warning would lop 200 million euros off its earnings.
Investment fund Capital Research and Management cut its Saipem stake to 1.3 percent from nearly 5 percent last month.
Some traders said Bank of America-Merrill Lynch, just a day before the profit warning, had sold 2.3 percent of the company for 30.65 euros per share. Saipem shares were at 20.7 euros on Thursday.
"I've been working the market for 25 years and I've never seen anything like this," said one trader.
Others said it was still not clear who had sold the Saipem stake.
Saipem and Merrill Lynch declined to comment, but a partner at a Milan-based brokerage played down the likelihood of any wrongdoing by the U.S. investment bank.
"Merrill surely didn't know about this," said the partner, who asked not to be named. "The broker often agrees to keep any unsold shares on its own book. Would you deliberately sell rubbish knowing you'd lose many times more money than you have made?"
A source at market regulator Consob said on Wednesday the watchdog would be investigating the alleged stock sale as well as share price movements at Saipem.
Two traders, a fund manager and a shareholder told Reuters some funds were debating whether to demand an annulment of the placement, which involved around 10 million shares.
"It takes three days to settle such a deal. I hear some funds want to ask for an annulment but I don't think it will be easy," one fund manager and Saipem shareholder said.