UPDATE 2-UK Milford Haven refinery sale fails; plant to be dismantled

(Corrects paragraph 10 to say previous refinery purchase was in Germany in 2010)

LONDON, Nov 4 (Reuters) - A deal to rescue the UK's Milford Haven oil refinery has collapsed, operator Murphy Oil said late on Tuesday, forcing it to permanently shutter the plant as the latest victim of a deep slump in the European refining industry.

Klesch Refining Limited, run by billionaire investor Gary Klesch, had agreed to buy the idled plant in July, but the deal was contingent on a combination of government support and private financing from banks. The deadline for that passed on Oct (HKSE: 3366.HK - news) . 31, according to a source familiar with the matter.

Murco Petroleum, a subsidiary of the U.S.-based Murphy Oil Corp, announced that the sale of the 135,000 barrels per day Milford Haven refinery, Britain's smallest, and related terminal assets has been cancelled.

"The parties are not engaged in further discussions," Murco said in the statement.

"The refinery is currently in a period of shut-down and will be decommissioned while the company seeks a buyer for the terminal facility along with the three inland terminals."

It said there would be a "significant number of redundancies". The source said that more than 300 of the 450 employees will be laid off, with the remainder staying on to operate the storage terminal.

Murphy has been trying for more than two years to sell the plant, which had been singled out as a candidate for closure as its location on the far west of the British Isles places it far from large demand centres.

Europe's ageing refining industry has been caught between declining demand, increased competition from state-of-the-art overseas operations and fierce new competition from U.S. plants fed with cheap shale oil, forcing a wave of closures.

More than 10 medium-sized refineries may need to shut by 2018 in order to balance the market, according to analysts.

Klesch, who bought another small refinery in Germany in 2010, has surprised the industry by betting that his austere, tightly run Geneva-based group can turn around once loss-making plants and succeed where bigger but less nimble oil majors fail.

Sources familiar with the matter had said earlier on Tuesday that Klesch and Murphy Oil had extended the deadline to later this week to negotiate the purchase.

"It became clear that Klesch would be unable to find the financing and at that point Murphy decided to draw a line," the source said.

There was no immediate comment from Klesch. (Reporting by Simon Falush, Ron Bousso and Anupam Chatterjee; editing by Jane Baird, Alan Crosby and Ken Wills)