CORRECTED - UPDATE 2-New Century, other US subprime lenders shares drop

(Corrects eleventh paragraph to show that New Century warned of losses rather than posting them. This error also appeared in update 1) (Adds analyst comment and H&R Block share movement)

By Tim McLaughlin and Dan Wilchins

NEW YORK, Feb 8 (Reuters) - This just in from London: the U.S. subprime mortgage market is in a tizzy.

London's HSBC Holdings Plc (HSBA.L) roiled shares of U.S. subprime lenders late Wednesday when just a few hours after a rival subprime lender posted a big loss, the U.K.-based bank said customer defaults jumped at its U.S. operations.

The subprime industry, which makes loans to borrowers with weak credit, is facing tough times as the air hisses out of the housing bubble. Defaults are rising as home prices slump, rates on many adjustable-rate mortgages adjust higher, and personal savings decline.

HSBC shares tumbled to a nine-month low and shares of California's New Century Financial Corp. NEW.N dropped 36 percent, their biggest decline in more than eight years.

The HSBC news also hit shares of H&R Block (HRB.N), which has announced plans to sell its Option One subprime mortgage unit.

The shares fell 32 cents, or 1.3 percent, to close at $24.52 on the New York Stock Exchange after slipping as much as 3.6 percent Thursday. There was concern that deterioration in the subprime sector will make it harder to H&R Block to shed its money-losing mortgage unit.

Trading in H&R Block put options was also active Thursday, an indication that investors expected Block's shares to fall.

"People are nervous about whether they'll be able to sell Option One," CIBC World Markets analyst Scott Schneeberger said.

A series of smaller subprime lenders have closed down in recent months, including Mortgage Lenders Network USA Inc., once the 15th-largest subprime mortgage lender, and Wachovia Corp.'s WB.N EquiBanc Mortgage unit.

HSBC, the second-largest U.S. subprime mortgage lender, and New Century Financial, which ranks third, said late Wednesday that new loan volume was declining, and investor demand for their loans was also lower.

New Century also said it expected a fourth-quarter loss and said it was restating three quarters of results.

HSBC Chief Executive Michael Geoghegan said most of his company's problem was in U.S. subprime mortgages, particularly for adjustable rate mortgages and second-lien loans.

"Management made a mistake in this brokerage business, where it went for volume and it went for second-lien business," Geoghegan said on a conference call. "It won't happen again."

Richard Shane, a mortgage analyst at Jefferies & Co. Inc., said it's hard to determine how severe the credit downturn is going to be in the subprime mortgage market. He said lenders can usually mitigate the effect of defaults by tightening underwriting standards, for example.