UPDATE 2-LS Power withdraws TransAlta takeover proposal

(Updates with closing stock price)

CALGARY, Alberta, Oct 9 (Reuters) - LS Power Equity Partners said on Thursday it scrapped plans for a C$7.8 billion ($7 billion) takeover of TransAlta Corp (TA.TO) as shares in the Canadian power producer fell further below the bid price.

LS Power and Global Infrastructure Partners, which own 9 percent of TransAlta, offered to buy the company in July for C$39 a share, saying it could achieve its expansion goals more easily as a private company.

As recently as this week, TransAlta Chief Executive Steve Snyder told Reuters that the offer, which was not formally made to shareholders, undervalued the company and its prospects in the North American power generation sector.

LS Power said in a regulatory filing on Thursday that it reserved the right to make another takeover proposal in the future if market conditions support such a move.

The bid withdrawal "is consistent with our view that weakness in global equity and credit markets had reduced the likelihood of a near-term takeover of TransAlta," BMO Capital Markets analyst Michael McGowan said in a note to clients.

TransAlta shares tumbled C$1.83, or 8 percent, to C$22 on the Toronto Stock Exchange. TransAlta has fallen 41 percent since the time LS Power announced the offer as financial markets have swooned.

The company runs coal- and gas-fired power plants as well as wind and geothermal facilities in Canada and the United States. Earlier this year, LS Power affiliate Luminus Management LLC campaigned to get the company to load up on debt to fund major stock buybacks.

"It's business as usual for TransAlta," spokesman Michael Lawrence said in response to the bid withdrawal. "We'll continue to execute our plan on which we believe will deliver near- and long-term value to our shareholders."

Snyder said on Monday that he believes takeover action in the electricity industry will be on hold until the market recovers to a point where players can be confident attaching a value to assets.

On Wednesday, TransAlta closed the $303.5 million sale of two Mexican power plants to a generation firm owned by Ontario Teachers' Pension Plan and an arm of U.S. bailout target American International Group (AIG.N).

It has pledged to use C$200 million ($174 million) of the proceeds to pay off purchases of its own shares.

($1=$1.15 Canadian) (Reporting by Jeffrey Jones; editing by Rob Wilson)