Serco is facing the threat of exclusion from future work after the government revealed serious faults with its prisoner escort services late on Wednesday. All its government work was put under review in July, following problems with an electronic tagging contract.

Shares in Serco, which gets around 45 percent of its revenue from UK public-sector work, were on course for their biggest one-day drop for 11 years on Thursday, slumping 10.3 percent to the lowest level since the start of the year.

Serco's latest contract problems will intensify a debate in Britain over the outsourcing of public services to profit-driven private companies. The tagging scandal has also led to criticism of Serco in the U.S. where it has won a $1.25 billion (806.13 million pounds) contract to help implement new online health insurance exchanges.

"We are working closely with UK government customers... and will put right any issues that arise from these reviews," Serco Chief Executive Christopher Hyman said in a statement on Thursday.

On Wednesday, the British government asked police to investigate alleged fraudulent behaviour by some Serco staff working on a 285 million pound ($442.77 million) prisoner escorting contract. A government probe had showed some staff recording prisoners as having been delivered ready for court when they were not.

In July, an audit found Serco, which runs facilities from Britain's Atomic Weapons Establishment to immigration detention centres in Australia, and rival G4S had charged for tagging criminals who were either dead, in prison or never tagged in the first place.

This prompted the government to put all if its contracts with both firms under review.

The uncertainty over future UK contracts led Cantor Fitzgerald analyst Caroline de La Soujeole to downgrade her rating on Serco from "buy" to "hold".

"Worst-case scenario is the company fails to redress the situation and is frozen out of all new government work - this would put Serco in a dire position," she said. "Best case, the police review shows this fraudulent behaviour is the doing of a few rotten apples, which are duly removed, and... it's business as usual for Serco."

Serco's contract problems took the shine off solid financial results, with adjusted pretax profit for the six months to June 30 up 10.5 percent to 127.1 million pounds.

Adjusted revenue rose 11.8 percent to 2.55 billion pounds, boosted by record contract wins in 2012.

However, the group said higher bid costs on new work pulled its adjusted operating margin down 23 basis points to 5.7 percent and that for 2013 the margin would be flat or slightly down on the 6.4 percent achieved in 2012.

Serco said it was on track to meet full-year profit expectations. The company is, on average, forecast to post pretax profit of 282.3 million pounds, according to a Reuters poll of 22 analysts.

The company said it had confirmed orders of 18.5 billion pounds, with a 30 billion pound pipeline of work it could bid for in areas including health, defence, and transport - some of which would be with the British government.

(Editing by Erica Billingham)

By Neil Maidment

Stocks treated in this article : Serco Group plc, G4S plc