UPDATE 2-Pacific Ethanol quarterly loss widens, shares fall

* Larger-than-expected loss on worsening margins

* Sales up 56 percent

* Shares drop more than 16 percent (Adds details, CEO and analysts' comments, share price)

NEW YORK, Nov 10 (Reuters) - Pacific Ethanol Inc (PEIX.O: Quote, Profile, Research) posted a deeper-than-expected quarterly loss as volatile corn and fuel prices pushed the ethanol maker further into the red, sending its stock down sharply.

Ethanol makers have suffered in recent months as a drop in gasoline and ethanol prices have outpaced the downturn in prices of corn, the main component of U.S. ethanol. That has pushed margins in many parts of the country into negative territory for the nascent industry.

Late last month, VeraSun Energy (VSUNQ.PK: Quote, Profile, Research), the largest publicly traded ethanol maker, filed for Chapter 11 bankruptcy protection, citing harsh market conditions.

Pacific Ethanol Chief Executive Officer Neil Koehler said the company had operated its plants at about 10 percent below capacity because of the weak margins and to conserve cash.

"As we previously stated, we will continue to adjust our production levels according to market conditions," Koehler told a conference call with analysts.

Still, Koehler said the increasing mandates for use of ethanol in the gasoline market and the slowing pace of ethanol output growth should help margins in 2009.