UK government questioned over Carillion contracts after profit warnings

* Opposition parties call for public inquiry

* Carillion (Frankfurt: 924047 - news) issued first profit warning in July

* Went on to win contracts worth 1.3 bln stg

* Government defends handling of the company (Adds opposition party, government commments)

By Andrew MacAskill

LONDON, Jan 15 (Reuters) - Britain's government is under pressure from opposition parties to explain why ministers awarded construction company Carillion 1.3 billion pounds ($1.8 billion) of new contracts after it was known to be in financial difficulty.

Carillion collapsed on Monday in one of Britain's biggest corporate failures, throwing hundreds of large projects into doubt and forcing the government to step in to guarantee vital public services.

Britain's opposition Labour and Liberal Democrat parties called for an investigation into the government's dealings with Carillion before the company collapsed.

Tussell, which runs a database of government contracts in Britain, estimates that Carillion was awarded government contracts worth 1.3 billion pounds after the company issued its first profit warning in July.

Jon Trickett, Labour's Cabinet Office spokesman, questioned why the government awarded three contracts to the group last year despite it being government policy to designate a company as "high risk" if it had issued a profit warning.

OPPOSITION CRITICISM

"Why was it apparent to everone except the government that Carillion was in trouble?" Trickett said in a debate in parliament.

The leader of the Liberal Democrats, Vince Cable, called for a public inquiry to examine what he described as "very questionable decisions made in the past few months".

Labour Party leader Jeremy Corbyn said that such work should never have been given to the private sector in the first place.

He described the collapse of Carillion as a "watershed moment" and said it was time to "end the rip-off privatisation policies that have done serious damage to our public services and fleeced the public of billions of pounds".

Carillion's collapse heaps more pressure on Prime Minister Theresa May's shoulders as she grapples with the tortuous negotiations on Britain's exit from the European Union and a deeply divided Conservative Party.

One of many private companies to run public services in Britain, Carillion had been fighting to survive after contract delays and a downturn in new business prompted profit warnings.

The company's contract to help to build the new HS2 rail line in the north of England was awarded on July 17, a week after it issuing a profit warning in which it noted a deterioration in cash flows.

The following day, Carillion won part of a 158 million pound Ministry of Defence contract to provide catering, hotel and mess services at 233 military facilities.

Carillion issued a second profit warning at the end of September and about five weeks later was awarded a 62 million pound rail contract.

Cabinet Office minister David Lidington defended the government's handling of the company.

The government had been monitoring Carillion closely after the first profit warning and in most cases awarded joint venture contracts so the other company could take over the work if there were problems, he said.

Senior (Other OTC: SNIRF - news) government officials told a committee of lawmakers that the government allowed the company to bid for contracts because it would have been illegal to stop it and could have accelerated the company's collapse.

"There's an issue here, but that doesn't necessarily mean that the government has to pull all its business because that could then trigger a complete collapse of the company," Cabinet Secretary Jeremy Heywood said.

(Reporting by Andrew MacAskill, additional reporting by Elizabeth Piper, graphic by Ritvik Carvalho,; Editing by Guy Faulconbridge and David Goodman)