* Government wins appeal over subsidy for second unit
* Reverses High Court ruling in July
* Drax to "consider options" for unit support
* Shares drop almost 11 percent (Adds detail, analyst comment, share price)
LONDON, Aug 7 (Reuters) - British power producer Drax said the government had won an appeal over a subsidy scheme for the conversion of one of its coal-fired generating units, reversing an earlier court decision in its favour and sending its shares sharply lower.
Drax operates one of Europe's largest coal power plants and is converting three of its six coal-fired power generation units to biomass by 2016 to reduce carbon emissions and costs.
The power producer said on Thursday that the Court of Appeal has overturned an earlier ruling by the High Court that the conversion of the second unit was eligible for a government subsidy.
Shares in the company, which is listed on the London Stock Exchange, had dropped by almost 11 percent to 634 pence by 1046 GMT.
Drax has already converted one unit at its West Yorkshire plant last year, and plans two more next year. The whole project will cost up to 700 million pounds ($1.18 billion).
Drax has sought government funding to help pay for the cost of the conversions, with the first unit receiving support under the Renewable Obligation (RO) scheme.
As a part of reforms of Britain's electricity market the government is changing the way it supports renewable energy projects by replacing direct subsidies with a contracts-for-difference (CfD) system whereby qualifying projects are guaranteed a minimum price at which they can sell electricity.
In April, the government said it would back the conversion of one of Drax's units under the CfD scheme but rejected the application for the second unit to be included.
However, Britain's High Court in July decided the utility had fulfilled all the key criteria set out by the government at the time of making its application.
The short-lived victory was then appealed by the government.
Drax said it will now "consider its options" for the unit's conversion and could try to get support under the older, RO scheme.
"We have no doubts that this conversion will now happen and that Drax will announce the precise timing in the not too distant future," said Angelos Anastasiou, utilities analyst at investment bank Whitman Howard. (1 US dollar = 0.5935 British pound) (Reporting by Nina Chestney and Sarah Young; Editing by Erica Billingham)