* Slashing capital would wipe accumulated losses off its books
* That would pave the way for the restart of dividends
* Banks seen unlikely to invest without prospect of dividends
* Possible preferred share issue sparks dilution fears
* Shares tumble 26 pct, loses $1 bln in market value (Adds fund manager comment, details on capital reduction)
By Ritsuko Ando and Ayai Tomisawa
TOKYO, May 11 (Reuters) - Japan’s Sharp Corp said it may reduce its capital and issue preferred shares as part of a planned restructuring, but worries about potential dilution from the new issuance and other possible fund raising sent its shares plunging 26 percent.
Battered by competition from cheaper Asia rivals in its core liquid crystal panel display business, loss-making Sharp has been working with its main lenders on securing its second major bailout since 2012.
A slashing of its capital would allow Sharp to wipe accumulated losses off its books - a necessary step before the company can resume dividend payments. The prospect of dividends in the not-too-distant future is seen as key to getting its banks and other potential shareholders on board with a rescue deal expected to be worth at least $1.7 billion.
A person familiar with the matter said at the weekend that Sharp is considering cutting its capital from more than 120 billion yen ($1 billion) to just 100 million yen. He declined to be identified as he was not authorised to speak publicly about the matter.
“The company will be able to start afresh after it wipes away its cumulative losses and receives new funding, so that part may be positive going forward,” said Takatoshi Itoshima, chief portfolio manager at Commons Asset Management.
But he noted that the preferred share issuance as well as the potential for other fund raising in the future had spooked investors on Monday. Preferred shares frequently have warrants attached that allow holders to buy stock later at a fixed price.
The Apple Inc supplier lost nearly $1 billion in market value by the end of trade. At one point its shares had tumbled as much as 31 percent or their daily limit of 80 yen to their lowest in more than two years.
Sharp declined to provide further details on Monday, saying it would make a final decision by Thursday, when it announces its new business plan.
Sources have said the plan will include a $1.7 billion debt-for-equity swap from its main lenders including a return for a promise to cut 5,000 jobs and to split off its ailing smartphone display unit.
It has also asked Japan Industrial Solutions, a corporate turnaround fund, to invest up to $250 million in capital, they have said.
Japanese media said the capital reduction is also aimed at easing its tax burden as it would allow Sharp to be classified as a small to medium-sized enterprise for tax purposes. While this would help a little, it will not result in major savings, said Yutaka Ban, chief credit analyst at SMBC Nikko Securities.
$1 = 119.88 yen Additional reporting by Reiji Murai and Hideyuki Sano; Editing by Kenneth Maxwell and Edwina Gibbs