UPDATE 1-Ambac shares sink as warns of possible bankruptcy

* Ambac says could run out of liquidity by 2Q, 2011

* Ambac shares fall 33 pct, MBIA also off

* Ambac says may explore bankruptcy, possible prepackaging (Adds analyst, background, byline, updates prices)

By Emily Chasan

NEW YORK, Nov 10 (Reuters) - Shares of bond insurer Ambac Financial Group Inc (ABK.N) sank 33 percent on Tuesday after the company warned it may be forced to seek bankruptcy protection if it cannot fix its liquidity problems.

"Ambac's available liquidity is currently insufficient to fund its needs beyond the near term and its failure to successfully execute on its current strategies could result in it running out of liquidity in the second quarter of 2011, or potentially sooner," the company said in a regulatory filing with the U.S. Securities and Exchange Commission late Monday.

Ambac said it may pursue strategies including "a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding" as it tries to deal with its issues.

Ambac, like its larger rival MBIA Inc (MBI.N), has struggled to write new business since losing its top-notch credit rating last year. The company is still battling losses on complex debt securities it insured.

"What's going to determine what happens with these companies is how quickly we're going to get an economic recovery," said Jim Ryan, a senior equity analyst at Morningstar in Chicago, who follows Ambac.

"For bond insurers and mortgage insurers, it really revolves around mortgage delinquencies and mortgage delinquencies continue to rise," Ryan added. "Until we start to see a turnaround in unemployment we expect there will continue to be a rise in delinquencies."

Shares of MBIA also fell almost 27 percent on Tuesday.

In the filing, Ambac said its liquidity is largely dependent on its Ambac Assurance unit's ability to pay dividends, which is not currently able to do and not expected to do in 2010 either, Ambac said.

Ambac said that if it is unsuccessful in its negotiations with creditors, it may consider a filing for bankruptcy without any agreements in hand from its creditors.

Ambac shares hit a low of 75 cents a share earlier and closed down 33 percent, or 39 cents, at 79 cents on the New York Stock Exchange. Shares of MBIA dropped $1.28 to $3.52 on the NYSE on Tuesday.

(Reporting by Emily Chasan; additional reporting by Dan Wilchins, editing Bernard Orr)