* German home improvement chain planned to operate under Max Bahr brand
* Says filing for insolvency for Max Bahr as well as holding company
* Praktiker had net debt of 535 mln eur at end-March
* Bondholders still working on plan amid talk of private equity interest (Adds name of administrator for Max Bahr)
FRANKFURT, July 26 (Reuters) - A rescue plan for Germany's Praktiker was cast into doubt on Friday after the home improvement retailer said it would file for insolvency for the business unit on which it had been pinning its hopes.
The group filed for insolvency earlier this month for the Praktiker Holding company and operating units, but spared its more successful Max Bahr chain and its international business.
But Praktiker said late on Thursday a trade credit insurer, named by unions as Coface, had withdrawn coverage for Max Bahr's suppliers - meaning that a supply of goods to its stores could not be guaranteed - and so it would also shortly file for insolvency for that chain.
Coface declined to comment specifically on Max Bahr and Praktiker. "But we do not see ourselves as the trigger for any insolvency," a spokesman said.
The planned insolvency of Max Bahr with its 132 stores, will make the search for investors for the Praktiker group, which has around 20,000 full and part-time employees, much harder.
Holders of 250 million euros ($331 million) of bonds had last week put forward a restructuring plan that would have seen them convert the debt into Praktiker shares and continue operating Praktiker with around 200 stores, but under the Max Bahr brand.
"This means the chances for our plan have become very slim. but we will try to get a group of investors together," Ingo Scholz, who represents the bondholders, said on Friday.
Praktiker, whose blue and yellow-branded stores selling paints, tools and gardening products are a familiar sight in Germany's out-of-town shopping centres, has been grappling with a decline in sales and profitability since it ended a '20 percent off everything' discount strategy.
It had been in the process of converting many of its Praktiker-branded stores to the Max Bahr brand, which traditionally had better profit margins.
It said in a statement on Friday that Jens-Soeren Schroeder was appointed administrator for the original Max Bahr unit, while Christopher Seagon would act as administrator for Praktiker sites lately rebranded as Max Bahr.
The insolvency administrator for the Praktiker holding company, Udo Groener, admitted prospects for shareholders and creditors had dimmed, but said there were positives, such as making it easier to terminate unfavourable contracts.
"It's getting yet more complicated," said a banking source.
The administrator expects to appoint an investment bank next week to find buyers for the whole business.
Several sources close to the case said there had been expressions of interest from private equity investors.
Praktiker's net debt burden increased significantly in the year to March, rising by more than a quarter to 535 million euros, while net cash shrank by more than a quarter to 51.3 million euros.
Along with the discount strategy, which meant customers only bought products when they were on offer, Praktiker also failed to modernise its stores - drawing comparisons with the demise of drugstore chain Schlecker.
Both parts of the group were hit by bad weather early in 2013, with like-for-like sales down 8.8 percent for Praktiker and 11.4 percent for Max Bahr.
Trade union Verdi said on Friday it was a "scandal" that Coface had withdrawn coverage and the group must not be broken up.
"Those that have done good business with Praktiker and Max Bahr for years must now play an active role in helping to give the companies and their employees a future," Verdi executive board member Stefanie Nutzenberger said.
Praktiker's shares - which traded at over 32 euros back in 2007 - closed down 11.6 percent at 0.114 euros.
$1=0.7555 euros Reporting by Alexander Huebner and Victoria Bryan; Editing by Greg Mahlich and John Stonestreet