UPDATE 2-Kier sinks after report of discounted sale of housebuilding arm

* Shares fall more than 35% to record low

* Housing business's quoted price tag "disappointing", Liberum

* Kier's combined credit score ticks lower - Refinitiv (Updates shares, milestone)

By Justin George Varghese

June 14 (Reuters) - Shares in Britain's Kier fell more than 35% on Friday to a record low after the Times newspaper reported the construction and services group was rushing to sell its housebuilding business at a discount to cut mounting debt.

The report was the latest setback for the group, which has contracts for major projects including London's Crossrail link, following a profit warning last week.

The shares fell as much as 36.3% to 129 pence by 1415 GMT, the lowest since it listed in 1996, erasing all of the 24% gains made since Kier's profit warning on June 3.

Last week's warning had sent Kier's shares down 40% to their lowest in two decades and wiped off 185 million pounds from its market value as investors speculated the company might cut dividend payouts and seek to raise more funds after a failed share issue last year.

The slump in the stock price comes amid pressure on Neil Woodford, one of Britain's best-known investors who has a near 16% stake in Kier as of June 5, after he froze his equity income fund last week due to increased redemptions.

The shares are highly shorted, with many investors betting they will fall further.

Since their latest profit warning, the volume of Kier shares on loan has gone from 12.9 million to 18.7 million, according to data from FIS Astec Analytics.

The Times reported http://bit.ly/2XHb7Ap on Friday that Kier, which has been looking to cut debt and simplify its structure, had sounded out advisers on the possibility of selling the housing division for 100 million pounds to 150 million pounds ($126-$190 mln) - a price analysts at Liberum deemed "disappointing", given the company valued it at 291 million pounds in 2018.

Kier declined to comment on the Times report.

"However, events are moving fast and disposals are likely to be complicated, given the JVs (joint ventures) in Property and Residential, they will be very dilutive," the Liberum analysts said.

Another housebuilder, Galliford, late last month rejected a 950 million pounds bid from Bovis to buy its residential division, judging it was not in the interests of all shareholders.

CREDIT INSURERS PULL OUT

The Times also reported that trade credit insurers Euler Hermes and Tokio Marine HCC have this week withdrawn cover insuring Kier's suppliers from any potential losses.

Trade credit insurance covers the risk of non-payment for goods or services.

"The article rightly observes that this may result in creditors demanding to be paid quicker," Liberum said.

Kier had aimed to pay off this year all of the 180.5 million pounds in debt it reported at the end of 2018, but has said it would likely still be in debt by the end of this year.

In March, Kier disclosed an accounting error that pushed up its 2018 debt by 50 million pounds.

Kier's combined credit score - which measures how likely a company is to default in the next year on a scale of 100 (very unlikely) to 1 (highly likely) - was currently at 2, down from 5 before the warning, according to Refinitiv Eikon data.

Several big British building companies have suffered since regulators tightened rules for contractors operating in the public sector after last year's collapse of Carillion and Interserve's move into administration in March. ($1 = 0.7910 pounds)

(Reporting by Justin George Varghese in Bengaluru; additional reporting by Helen Reid; editing by Patrick Graham and Louise Heavens)