By Matt Daily and Michael Erman

Still, the company's shares erased early gains and fell as much as 45 percent in afternoon trading despite its statement that its bankers remained committed to a $2 billion line of credit it picked up late last month.

Constellation's abrupt fall from grace shows that the credit crisis that has shaken the financial markets and transformed the U.S. finance industry is starting to rattle other industries as well.

Its stock shed 58 percent in the past three days, by far the worst performer in the utilities sector, on concerns about the lack of counterparties for the trading business due to the current financial crisis.

Credit rating agency Standard & Poor's said it may cut its 'BBB' ratings on the company's debt if Constellation did not take rapid action to shore up its balance sheet.

S&P said that if those actions were not taken, "a multiple-notch downgrade is likely," which could require a cash infusion for collateral to support Constellation's trading operations.

"We do not expect the company to withstand such a rating action," S&P said.

S&P said it had confirmed Constellation management's statement that Royal Bank of Scotland and UBS' commitments for a $2 billion credit facility remained strong, and said the Baltimore-based company had informed it that talks regarding an outright sale of the company were at "an advanced stage."

The company, a power and gas wholesaler and owner of Baltimore Gas & Electric, declined to comment on potential buyers or whether it would seek to sell the company in its entirety. It said it has hired Morgan Stanley and UBS to advise it on strategic alternatives.

An outright sale might be the only path open for Constellation, Sanford C. Bernstein analyst Hugh Wynne said.

"You need somebody that's well-capitalized and unaffected by the credit crisis and that, I think, precludes the normal path, which would be to go to Wall Street and find someone who wants to take on more trading business," he said. "That doesn't sound like it's going to work."

He said France's EDF SA , which already owns nearly 10 percent of Constellation, and Exelon Corp could be good fits. Exelon declined to comment.

The Financial Times said late on Wednesday that EDF was considering a bid, citing people close to the situation. EDF recently doubled its stake in Constellation to 9.51 percent under an agreement that limited its purchases to 9.9 percent of the company.

EDF declined to comment on whether it planned to invest in Constellation, and also on reports it and British Energy were close to reaching a takeover agreement with EDF being prepared to sweeten its 12 billion pound ($21.38 billion) offer.

'ACUTE CRISIS'

The company's trading business has been a drag on its stock since August, when Constellation disclosed that a credit rating downgrade could force it to post billions of dollars of extra collateral. It later took steps to shore up its liquidity, including making an agreement for the additional $2 billion credit facility.

Wynne said the trading business has been well-run since its inception, but could be a problem in the current credit environment.

"The trading business is one that relies on ready access to liquidity," he said. "There's a time when you can take that type of risk, when markets are awash with liquidity, and there's a time when you can't, like today."

More than 80 percent of Constellation's total revenue of $9.9 billion in the first half of 2008 came from trading and its industry-leading wholesale power sales arm, while the rest came from its sale of power and gas into regulated markets.

Despite the reassurances about the $2 billion credit line, S&P warned the company still faced hurdles.

"Constellation is facing an acute crisis of confidence that has resulted in a decline in its stock price and a widening of its five-year (credit default swaps) spreads," S&P said, noting that some of its trading counterparties may have started backing away from new deals.

The cost to insure Constellation's debt in the credit derivative market soared 30 percent on Wednesday to a new record of 794 basis points, or $794,000 per year for five years to insure $10 million in debt, according to Markit Intraday.

Another analyst said Constellation could also seek a partner with a strong balance sheet to back up its trading operation, much like Sempra Energy did with RBS.

"I don't think they need to be bought totally, they may just need a partner for the trading book," said Dot Matthews, analyst with CreditSights.

Constellation also reiterated that its exposure to financial institutions was limited, and that its credit exposure, net of collateral, to banks was about $120 million. Its exposure was no higher than $28 million to any single financial institution.

Shares of Constellation closed down nearly 20 percent at $24.77 on the New York Stock Exchange, down 77 percent from their 52-week high of $107.97 on January 8. The stock traded as low as $16.70 earlier in the day.

(Additional reporting by Karen Brettell; Editing by Bernard Orr and Quentin Bryar)