UPDATE 2-Nortel shares plunge ahead of interest payment

(Adds CBC report of Board meeting in paragraph 5, updates share price in paragraph 6)

By Wojtek Dabrowski

TORONTO, Jan 13 (Reuters) - Shares of Nortel Networks Corp NT.TONT.N fell more than 20 percent on Tuesday, two days before the struggling Canadian telecom equipment maker is due to make an interest payment of about $107 million.

North America's biggest maker of telephone gear had about $2.3 billion in cash and cash equivalents at end of September, suggesting it would have no difficulty in making the payment.

Even so, Duncan Stewart, an analyst at DSAM Consulting in Toronto, said: "The issue is not whether or not they can pay it. ... It's the idea of: if you know you're eventually going to default anyway, why not do it now and keep the ... interest payments you would have shelled out?"

A Nortel spokesman declined to comment on whether the company would make the payment. "It is our policy to not comment on our creditor obligations other than what we disclose in our public filings," he said.

CBC News reported that Nortel's board of directors would meet on Tuesday evening to decide whether or not to make the interest payment.

Nortel's shares closed down 24.5 percent at 38.5 Canadian cents on the Toronto Stock Exchange. In mid-2000, they were worth more than C$1,100 each, adjusted for a stock consolidation that took place in late 2006.

RBC Capital Markets analyst Mark Sue said bankruptcy was a "distinct possibility" for Toronto-based Nortel and that it could collapse under its debt load before 2011.

Last month, a media report said Nortel had sought legal advice on a bankruptcy-protection scenario in case its current restructuring plan failed.

Nortel's 10.75 percent notes due in 2016 fell to 24.5 cents on the dollar on Tuesday, yielding almost 50 percent, according to MarketAxess data.

Nortel has faced intense competition from North American and European rivals such as Alcatel-Lucent (ALU.N)(ALUA.PA), as well as low-cost Asian vendors such as Huawei Technologies [HWT.UL].

The company has also suffered as telecom companies scale back spending on the equipment that Nortel makes.

The global economic slowdown has exacerbated Nortel's problems, leading it to warn last month that because of current conditions, its business is under pressure and its cash and liquidity are deteriorating.

In November, it reported a $3.4 billion quarterly loss, cut its 2008 outlook and announced 1,300 layoffs, or about 5 percent of its staff.

It also said it would freeze salary increases, cut back on consultants and review its real estate portfolio. (Additional reporting by Walden Siew in New York; Editing by Frank McGurty and Ted Kerr)

($1=$1.23 Canadian)