UPDATE 1-PREVIEW-Life insurers in tough spot, may get Fed aid

* Analysts predict Q1 will be worst ever for the industry

* Insurers seek federal funds

* Capital shortfall could spur M&A (Adds Genworth share price)

By Lilla Zuill

NEW YORK, April 9 (Reuters) - U.S. life insurers, already weakened by the global financial crisis, are expected to report their worst-ever quarterly results in the coming weeks, stoking expectations that federal funds will be needed to prevent the sector from becoming the next casualty of the recession.

Some insurers are stronger than others, but the entire sector has been weakened, laying groundwork for takeovers or mergers forced by regulators to head off company failures.

The Dow Jones U.S. Life Insurance Index .DJUSIL has fallen nearly 70 percent since last September as investment losses hit balance sheets.

Hartford Financial Services (HIG.N), a large life and property insurer, has seen its market value shrink more than 80 percent, as has Lincoln National Corp (LNC.N) and Conseco Inc (CNO.N).

Life insurers including MetLife (MET.N), the largest and strongest of U.S. life insurers, and Hartford are due to report first-quarter results later this month.

"Deteriorating core earnings, a substantial number of write-downs, and escalating realized and unrealized credit losses, are all factors likely to drive disappointing results," Morgan Stanley analyst Nigel Dally wrote in an April 6 note.

Major rating agencies have indicated that there was greater likelihood of downgrades than upgrades. In February, Standard & Poor's said it was concerned about a decline in the "overall credit-worthiness" of the sector.

Charges for goodwill and deferred acquisition costs, or DAC, will hurt some companies in the first quarter, according to Citigroup analyst Colin Devine.

LIFELINE DOWN THE PIPELINE?

Life insurers, which together hold trillions of dollars in investments, are particularly susceptible to the financial crisis, and for that very reason they may be positioned to receive federal assistance.

Government bailout efforts have been focused on stabilizing the banking system and American International Group Inc (AIG.N), once the largest insurer in the world. But on Wednesday, the U.S. Treasury said some life insurers would be considered for the federal capital purchase program.

Life insurers hold about half their assets in bonds and are the single largest source of U.S. corporate bond financing, holding about 18 percent of total issuance, according to figures compiled by trade group American Council of Life Insurers.