CORRECTED-UPDATE 2-Regulatory woes, lower volatility spoils IG Group's third quarter

(Corrects paragraph 8 to compare EU, UK client numbers on a sequential basis, not year-on-year)

* Q3 revenue down nearly 30 pct to 108 million pounds

* Client numbers almost halve to 51,800 in EU and UK

* IG also cites lower volatility for revenue decline

* Shares hit 2-year low, CMC and Plus500 also down in early trade

March 21 (Reuters) - Shares in IG Group fell to a two-year low on Thursday after the British financial trading firm reported a 29.4 percent drop in quarterly net trading revenue, hit by stricter regulations and persistently low market volatility.

London-listed trading platforms have been battling a shrinking client base as regulators tighten rules on products that allowed anyone with a bank card to make highly leveraged bets on financial markets via apps and online platforms.

Britain’s Financial Conduct Authority said last month that the European Securities and Markets Authority’s (ESMA) temporary curbs on contracts-for-difference (CFDs) will become part of UK domestic law when Britain leaves the EU, due on March 29.

CFDs give an investor exposure to price movements in securities without owning the underlying asset.

IG, which provides online stockbroking and trading services, also blamed a decline in volatility in financial markets throughout the quarter, which it said led to persistently lower market activity in February.

The CBOE volatility index, seen as Wall Street’s fear gauge, has tumbled since a December peak as investors stay on the sidelines and wait for clarity around China-U.S. trade talks and Brexit.

IG, which started as the world’s first spread-betting firm in 1974 with just three employees, saw net trading revenue drop to 108 million pounds in the quarter ended Feb. 28 from 152.9 million a year earlier.

IG saw client numbers rise 1.5 percent to 51,800 in the European Union and the UK in the third quarter from the second.

“We had not anticipated a particularly bullish statement from IG but this is worse than we expected,” analysts at Shore Capital said.

The stock was down 45 pence or 8.2 percent at 503p by 1010 GMT, after falling as low as 492.2p, its lowest since April 2017. The decline also dragged down rivals Plus500 Ltd and CMC Markets in early trade.

CMC Markets had last month forecast a fall in fourth-quarter revenue for its unit that offers trading products to retail clients.

To cushion the hit from the regulatory curbs, companies have been focusing on re-categorizing their retail clients as professionals.

IG said 1,425 more clients from the region regulated by the ESMA had applied to be classified as professional during the quarter, though only 14 percent of those applications were accepted.

Reporting by Muvija M in Bengaluru Editing by Bernard Orr and David Holmes