Beleaguered discount retailer Kmart's board of directors met on Tuesday to discuss financial options — possibly even bankruptcy — as the company's stock took another dive.

The nation's second-largest discount retailer has said that it may need additional financing from banks after months of weak sales, especially over the crucial Christmas shopping season.

Since the beginning of the year Kmart stock has lost half its value. Kmart has been losing market share to rivals Wal-Mart and Target Corp.

Shares of Kmart, which is expected to report a loss for its fiscal 2001 year, fell 39 cents or 13.73 percent to $2.45 on the New York Stock Exchange in midday trading.

The stock started its decline when Moody's Investor Services downgraded the Troy, Michigan-based retailer's debt to ''junk'' status in December. Troubles were compounded when Prudential Securities suggested the company may file for bankruptcy if its fortunes do not improve.

On Monday, Standard & Poor's cut Kmart's senior credit and debt ratings. S&P, which also warned of further downgrades, cited worries that the retailer's financial flexibility is eroding and its suppliers are losing confidence.

The retailer, in the middle of a $2 billion restructuring, also said it was reviewing its business plan for 2002 and 2003.

"I'm not surprised the board is meeting,'' Kurt Barnard, president of Barnard's Retail Consulting Group, said. "If they don't get the credit, the only solution I can see is a Chapter 11 (bankruptcy).''

Richard L. Church, an analyst at Salomon Smith Barney, said Tuesday that it was lowering its risk rating on the Troy, Mich.-based retailer from "high'' to "speculative,'' given the uncertainties surrounding the company's situation and outlook.

"While ... we believe that Kmart has many options it can explore in order to meet its liquidity over the coming 12 to 18 months, other less quantifiable factors such as lack of vendor support have elevated Kmart's risk profile considerably more than we thought to be the case as recently as yesterday,'' Church wrote in a research report.

Calls to the company, whose history dates back to 1897, were not immediately returned.

Profits Were Slashed along With Prices

When Chief Executive Charles Conaway took office in June 2000, he unveiled a wide-ranging turnaround plan to battle Target and Wal-Mart by improving the company's flow of goods from warehouses to stores and enhancing customer service. Conaway also has cut prices on some 40,000 common household products like food under a "BlueLight Always'' marketing campaign that drew on its popular "Blue Light Special'' promotions.

But the new discounts and an accompanying cut in the retailer's advertising budget failed to generate sufficient sales to boost profits. In its fiscal third quarter, Kmart reported a net loss of $224 million.

One Wall Street analyst said that Kmart never should have tried to compete with Wal-Mart on price because Wal-Mart is able to squeeze enormous efficiencies from its infrastructure and sheer size. Wal-Mart is the world's largest retailer.

"A major mistake that Conaway made was to advertise lower prices rather than to advertise the strength of their brands like Martha Stewart and Route 66,'' Ulysses Yannas, retail analyst with Buckman, Buckman & Reid, said.

Kmart sells housewares under the label of the guru of home entertainment, Martha Stewart.

During the U.S. economic recession, both Target and Wal-Mart have seen sales rise at their discount stores as consumers, wary of job cuts and volatile stock markets, looked for value. But Kmart was unable to lure enough customers in the shrinking economy.

Landlords, Vendors Concerned

Some analysts expect that Kmart will be forced to close a large number of its 2,100 stores in a bid to cut costs.

"We continue to believe that a meaningful downsizing of Kmart's stores base, possibly involving 200 to 400 stores, is possible and necessary and could help put the company on firmer footing down the road,'' Richard Church, a retail analyst at Salomon Smith Barney, wrote in a research note on Tuesday.

Most agree, however, that the retailer needs to take some quick action to reassure its vendors.

Adam Winters, senior vice president of Merchants Factors Corp., which provides loans to small and midsized apparel companies, said that Kmart has been slower in paying its vendors since November. He added that many of his small apparel clients are holding off on their spring shipping to Kmart for fear of not getting paid.

"They are waiting to see what happens,'' he said.

Said Harold Dundish, executive vice president at GMAC Commercial Credit LLC, which supplies financing to some of Kmart's apparel vendors: "My vendors are very concerned because Kmart is such a big purchaser of their goods.''

Reuters and the Associated Press contributed to this report.