By Svea Herbst-Bayliss

Unrealized investment portfolio and commercial paper losses nearly doubled to $10 billion in the fourth quarter, while net income slid 71 percent and the Boston-based financial services group dramatically pared back this year's earnings outlook.

State Street, which had been largely unscathed by credit market turmoil, shed more than half of its value at one point on Tuesday, wiping out as much as $8 billion in market capitalization on concern over unrealized portfolio losses and fears that it might need to raise capital to write these off at some point.

Investors were clearly "spooked," said Gerard Cassidy, an analyst at RBC Capital Markets. "These results were very disappointing."

State Street, known for its conservative management style, said it expects only flat revenue this year after delighting investors with annual revenue growth of 8 percent to 12 percent for the past several years.

"People are going to want to hear why State Street's earnings outlook has changed so dramatically," Cassidy said.

State Street, which received $2 billion from the government last year as part of the Treasury's Troubled Asset Relief Program, had been seen as one of the more stable companies in the banking and asset management industry.

But fourth-quarter net income shrunk to $65 million, or 15 cents per share, from $223 million, or 57 cents per share, a year earlier. On an operating basis, earnings fell to $511 million, or $1.18 per share, from $540 million, or $1.38 per share, a year earlier.

Assets under management shrank by 27 percent from the year-earlier quarter to $1.44 trillion at December 31. Custody assets fell 21 percent to $12.04 trillion.

QUARTERLY CHARGE

State Street took a $450 million charge for the cost of protecting investors in some portfolios by supporting so-called stable value accounts managed by its investment management unit, SSgA. The results also include costs from cutting its workforce by 6 percent last year.

The unrealized losses were detailed in a regulatory filing made late on Friday.

"Releasing it at this time may protect the company but it certainly reinforces the fact that in this stock it is caveat emptor (let the buyer beware)," Ladenburg Thalmann analyst Richard Bove wrote in a note to clients on Monday.

State Street Chief Executive Ron Logue said the unrealized losses "continue to concern us" but they improved slightly in recent weeks. On a conference call, he also assured analysts that the company has no plans to raise equity at the moment.

When asked about the dividend, Logue said that no final decision has been made. Several companies have slashed dividends in the wake of the financial crisis.

After-tax, unrealized mark-to-market losses in its investment portfolio rose $3.0 billion in the quarter to $6.3 billion, while unrealized losses in its asset-backed commercial paper program increased $1.4 billion to $3.6 billion.

As of Friday, unrealized after-tax losses in the investment portfolio had narrowed to $5.9 billion.

In a regulatory filing on Tuesday, the company said it would take a charge to earnings if unrealized losses were determined to be other than temporarily impaired. In the fourth quarter it recognized a charge of $78 million as a result of other-than-temporary impairment.

State Street said if a future charge were significant, "a rating agency might downgrade our credit rating or put us on credit watch."

State Street shares were down $17.81 to $18.54 in early afternoon trading on the New York Stock Exchange; they fell as low as $16.30 at one point.

Quarterly revenue rose to $2.7 billion from $2.5 billion a year earlier.

(Editing by John Wallace and Gerald E. McCormick)