RPT-UPDATE 2-Australia's Fortescue tumbles again, Fitch warns on rating

* Fitch revises outlook to negative

* Shares close down 8.5 pct, hit lowest in three years

* Sells power station for $300 mln to reduce debt load

* Move follows a scaling back of expansion plans, job cuts

* Iron ore price continues slide on weak China demand

By Miranda Maxwell

MELBOURNE, Sept 5 (Reuters) - Shares in Australia's Fortescue Metals Group Ltd slid to the lowest in three years on Wednesday, with the company losing $1.4 billion in market value over the past two days on shelved expansion plans and falling iron ore prices.

Fitch Ratings agency put the company on negative watch, warning that its fortunes were at the mercy of prices for the steelmaking raw material.

A drop in iron ore prices to their lowest since 2009 has forced Fortescue, saddled with $11.3 billion in long term debt, to slam the brakes on plans to triple its iron ore capacity and announce hundreds of job cuts.

The decision by Fortescue, which had been one of the most vocal bulls on Chinese demand, highlight how quickly events are moving in the resources sector. The company had reassured investors just last week that its expansion plans were on track.

"Through all the dark days of the European debt crisis, and the questions over China's growth trajectory, Fortescue has been one of the market's 'beacons of hope', continually defying the naysayers and achieving the unachievable," said Cameron Peacock, market analyst at IG Markets.

"Those ambitions are no longer."

Shares in Fortescue, which sells almost all its iron ore to China, lost as much as 10 percent in early trade and ended down 8.5 percent at A$3.12, its lowest close since June 2009.

Fitch cut its outlook on the company to negative shortly before the close of trade, saying that while Fortescue's plans would alleviate some liquidity and debt pressures, it was not out of the woods yet.

"The ability to satisfy its covenant compliance remains dependent on the recovery of iron ore price to around $110 per tonne," Fitch said.

Other ratings agency have also issued warnings, with Standard & Poor's saying Fortescue's credit quality would be at risk if iron ore prices stay below $100 a tonne through December.

Iron ore prices have dropped 36 percent since early July to below $90 a tonne, their weakest level since October 2009.

ASSET SALE

Weaker ore prices knocked other iron ore miners. Shares in BHP Billiton Ltd , which has put off a decision on a $20 billion expansion of its main Pilbara iron ore port, closed 1.6 percent lower while Rio Tinto Ltd shares dropped 2 percent.

Among smaller players, Arrium Ltd slumped 10 percent and Sundance Resources Ltd dived 13 percent.

Fortescue said it would sell a power station at its main mine site in Western Australia's Pilbara district to a unit of Canada's TransAlta Corporation for $300 million -- a sale that gives the company a bit of breathing space.

"They are looking to defer expansion, and therefore drawing down on further debt, until such time as a bit of clarity and a bit of recovery comes into the iron ore price. That's what they are looking to achieve, and the power station sale goes some way to that plan in the shorter term," said Lew Fellowes, analyst at broker Pattersons Securities.

Fortescue had been negotiating the sale of its 125 megawatt dual-fuel power station at the Solomon mine in Western Australia's Pilbara region for some time. As part of the deal, Fortescue will purchase power from the station for its Solomon mine for 16 years, with rights to extend the agreement.

Fortescue has said it expects the Solomon mine, due to come on stream in the fourth quarter, to yield around 60 million tonnes of iron ore annually.

It has also said it may sell its accommodation facilities or a stake in some undeveloped mines to free up further cash.