By Svea Herbst-Bayliss

Unrealized investment portfolio and commercial paper losses nearly doubled to $10 billion in the three months to December 31, while net income slid 71 percent and the Boston-based financial services group scaled back this year's earnings outlook.

State Street, which had been largely unscathed by credit market turmoil, shed more than half its value at one point on Tuesday as investors drove its stock price to a 12-year low on concern the company might be forced to raise fresh capital to write off losses.

The stock slide wiped out as much as $8 billion in market capitalization of a company that holds trillions of dollars in securities in custody and calculates the bulk of mutual fund prices found every morning in national newspapers.

"For State Street, this is the worst news we've ever seen in a day by far," said Gerard Cassidy, an analyst at RBC Capital Markets, describing investors as "spooked."

"These results were very disappointing."

State Street, a 217-year-old banking icon known for its conservative management style, forecast flat revenue this year after delighting investors with annual revenue growth of 8 percent to 12 percent in recent years.

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

But fourth-quarter net income shrank 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 fell 27 percent from the year- earlier quarter to $1.44 trillion at December 31. Custody assets dropped 21 percent to $12.04 trillion.

QUARTERLY CHARGES

State Street took a $450 million charge in the quarter for the cost of protecting investors in its so-called stable value accounts managed by its SSgA unit. It also spent $306 million to cut its workforce by 6 percent and $78 million on a writedown to reflect investment portfolio losses that are no longer considered temporary under U.S. accounting rules.

State Street Chief Executive Ron Logue said the unrealized losses "continue to concern us," but they improved slightly in recent weeks. An unrealized loss results from holding onto an asset rather than cashing it in and officially taking the loss.

On a conference call, he also assured analysts the company has no plans to raise equity at the moment.

Logue told Reuters the sharp share price decline is linked "to the story of unrealized investment losses which is so overpowering." But he also stressed the problems are related to a lack of liquidity created by the financial crisis, not by bad credit. He also said that, fundamentally, State Street's business is sound.

"The underlying business is doing extremely well," Logue said.

The fourth quarter's unrealized losses, which have worried investors for months, were first 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.

When asked about the dividend, Logue said 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 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.

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 $18.54 at $17.79 in afternoon trading on the New York Stock Exchange. They fell as low as $15.25 at one point.

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

(Editing by Jason Szep; Editing by Andre Grenon)