Beleaguered discount retailer Kmart's shares plunged to a 36-year low on Wednesday after Standard & Poor's said it would drop the discount retailer from its S&P 500 index, as bankruptcy worries mounted.

Kmart's bonds are trading nearly "flat'', or at about the same prices regardless of maturity — a condition analysts said indicates bankruptcy is near.

Kmart shares closed off 85 cents, or 34.69 percent, at $1.60 on the New York Stock Exchange. During the session, the stock hit a low of $1.27, a level unseen since May 1965, according to data from Standard & Poor's that has been adjusted for stock splits. More than 129 million shares changed hands, making it the most actively traded on the exchange.

"The stock is trading on pure emotion,'' said Eric Beder, retail analyst at Ladenburg, Thalmann & Co. "They've needed to say something for weeks. If Kmart is not going to declare Chapter 11, they need to come out and forcefully say that.''

Kmart's 9.375 percent notes maturing in 2006 and 9.875 percent notes maturing in 2008 were bid on Wednesday at just 48 cents on the dollar, down about 8 to 10 cents from Tuesday.

The three major U.S. debt rating agencies dealt Troy, Michigan-based Kmart another blow on Wednesday by cutting its debt to a low ``junk'' grade. The downgrades raise Kmart's borrowing costs.

Investors and analysts had hoped that Kmart would disclose how it will address Wall Street's concerns about a possible bankruptcy following a meeting of the company's board of directors on Monday and Tuesday. So far, the company has not issued a statement.

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

Plunge Started in December

The stock started its decline when Moody's Investor Services downgraded the 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.

Adding to Kmart's woes, Standard & Poor's said after the stock market close on Tuesday that it would drop the Troy, Michigan-based Kmart from its S&P 500 Index. That action was expected to trigger selling from managers of index funds who base their portfolios on the stocks in the index.

"A lot of people manage money based on the S&P index,'' Marie Driscoll, a retail analyst with Argus Research, said. "A lot of funds, whether they think the shares are undervalued or not, are just going to drop the shares.''

Also, Kmart said last week it was in talks with lenders, may seek additional financing from its lenders and was reviewing its business plans for 2002 and 2003.

One analyst said the company is probably tending to details before releasing a statement.

"Maybe nothing is resolved yet,'' Argus' Driscoll said. ''Maybe they are still ironing out some loan arrangements.''

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

Ripple Effect

A Kmart bankruptcy filing could have a ripple effect on suppliers and other businesses with financial ties to the discount chain that has nearly $40 billion in annual sales and 2,100 stores.

Prudential Securities on Wednesday lowered its rating on Rayovac Corp. to "hold'' from "`buy'', citing the No. 3 U.S. battery maker's exposure to Kmart.

Salomon Smith Barney's investment rating for Kimco Realty Corp. was cut to "neutral'' from "outperform''. The analyst cited uncertainty about the future of Kmart, which is Kimco's largest tenant.

Standard & Poor's said in a statement that two unnamed companies that provide intermediate financing to suppliers had advised clients to withhold shipments to Kmart.

The only good news for Kmart came from household advice guru Martha Stewart's Martha Stewart Living Omnimedia, which sells linens, housewares and home decor items in Kmart stores under her name, which said on Wednesday it is not currently looking to back out of its contract with the retailer, although the contract could be terminated under a bankruptcy.

A spokeswoman for Procter & Gamble Co., which makes products including Tide laundry detergent and Crest toothpaste, said on Wednesday that Kmart was still paying its bills in a timely fashion. Bankrupt underwear maker Fruit of the Loom and grocery supplier Fleming Cos. also said Kmart was making payments on time.

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.

Reuters and the Associated Press contributed to this report.