BUZZ-Pearson: capitulation

(Adds analyst comment, updates prices)

** Pearson (Xetra: 858266 - news) extends earlier drop, now down more than 27 pct in what is poised to be stock's worst ever day

** More than $2 bln wiped off the company's market-cap following its latest profit warning on back of a grim outlook for its North American education business, in what Panmure Gordon analyst calls a "textbook capitulation"

** Pearson cut its profit outlook for next 2 yrs and says it will have to reset its 2017 dividend, the one factor keeping income-oriented investors in the stock

** Morgan Stanley (Xetra: 885836 - news) calls move on dividend "a major shift"

** "The dividend was previously sacrosanct. This has been the major prop to the share price," Morgan Stanley analysts say in note to clients

** Sentiment heading into numbers was relatively upbeat with stock having climbed 13% from early Nov low

** Company blames "unprecedented" decline in its North American biz, and says may sell stake in Penguin Random House

** Pearson remains among most borrowed UK stocks by short-sellers, with 6% of shares outstanding on loan, per Markit (NasdaqGS: MRKT - news)

** Smith & Williamson's Mark Swain, who initiated a short position in Pearson a year ago, says continues to hold bearish bets

** Stock's plunge coming on heavy volumes with more than thrice a full-day's average traded within first two hours

** By far and away biggest faller on Stoxx 600 and UK's FTSE 100 (RM (LSE: RM.L - news) : tricia.wright1.thomsonreuters.com@reuters.net)