UPDATE 2-RC2 ends deal to buy children's publishing unit

(Adds details, analysts' comments, share movement)

BANGALORE, Sept 30 (Reuters) - U.S. toy company RC2 Corp (RCRC.O) terminated its $163 million purchase agreement for the Children's Publishing Division of privately held Publications International Ltd, citing high financing costs and adverse capital markets.

Shares of the company, which fell to a low of $20.05 earlier, were trading down 15 percent at $20.18 in afternoon trade Tuesday on Nasdaq.

"They (shares) are down because investors liked the prospect of this acquisition, so it's negative that it was cancelled," Needham & Co analyst Sean McGowan wrote in an email to Reuters.

In June, the Oak Brook, Illinois-based toymaker said it planned to buy the Children's Publishing Division (CPD) to further expand into the market for preschool products.

The deal would have diversified RC2's revenue and distribution, contributing as much as 10 percent to 2008 earnings and even more to 2009, said McGowan, who has a "hold" rating on the stock.

Robert W. Baird & Co analyst J. David Cumberland said, "The acquisition was designed to bring diversification through a new platform (early learning) that would complement existing categories in providing solutions for parents under the Learning Curve brand."

Lincolnwood, Illinois-based CPD's products include electronic books and story books that are sold at toy stores, warehouse clubs and book retailers throughout North America, Europe, Latin America and Asia.

Baird's Cumberland said his "neutral" rating on RC2 primarily reflects continued concerns about retailer ordering, consumer spending, and competition. The company's larger rivals include Hasbro Inc (HAS.N) and Mattel Inc (MAT.N).

Robert W. Baird had served as financial advisor to RC2 in the proposed acquisition of Children's Publishing Division.

"We hope to revisit this acquisition when the economic environment and capital markets show improvement," Curt Stoelting, RC2 chief executive, said in a statement Tuesday. (Reporting by Dilipp S. Nag in Bangalore; Editing by Himani Sarkar, Anil D'Silva)