UPDATE 2-Fifth Third, Regions banks skid after downgrade

(Recasts, adds dateline)

NEW YORK/BANGALORE, Jan 30 (Reuters) - Regions Financial Corp (RF.N) and Fifth Third Bancorp (FITB.O) shares skidded on Friday after an analyst downgraded the large U.S. regional banks, saying they may need capital that would "dramatically" dilute shareholder interests.

Bernstein & Co analyst Kevin St. Pierre downgraded Birmingham, Alabama-based Regions and Cincinnati-based Fifth Third to "market perform" from "outperform." He lowered his price targets on Regions to $5 from $9, and on Fifth Third to $4 from $7.

The analyst said the banks are in a "precarious position" because the economy is deteriorating rapidly, and now have "thin" capital and low levels of reserves to cover future credit losses.

Regions operates mainly in the U.S. Southeast, while Fifth Third has large operations in the Midwest, as well as Florida.

"There is a low but non-zero probability that both banks will need to raise common equity," St. Pierre wrote. "It could be difficult for each company to attract investors at a price high enough so as not to be dramatically dilutive."

Failure to raise sufficient capital could force both banks to find buyers, presumably at discounts to their already low share prices, he said.

Last week, Regions posted a fourth-quarter loss of more than $6.2 billion while Fifth Third lost more than $2.1 billion, in large part due to a goodwill writedown.

In late afternoon trading, Regions was down 69 cents, or 16.7 percent, at $3.45, while Fifth Third fell 62 cents, or 20.3 percent, to $2.43. The banks were the biggest percentage decliners on the 24-member KBW Bank Index .BKX. (Reporting by Jonathan Stempel in New York and Supantha Mukherjee in Bangalore; Editing by Vinu Pilakkott and Gerald E. McCormick)