* Starts consultation on potential closure of Daw Mill
* Plans restructuring to isolate risk of each deep mine
* Restructuring is beyond existing "strategic recovery plan"
* In talks with banks over funding requirements
* Shares tumble over 30 pct
By Clara Ferreira-Marques
LONDON, March 14 (Reuters) - UK Coal Plc warned on Wednesday it could close Britain's largest coal mine as part of broader restructuring efforts to turn around a group dogged by debt and years of losses.
UK Coal, which bought British Coal's core mining assets after the privatisation of the state miner in 1994, returned to profit last year, but said in January that recovering production levels at the underperforming Daw Mill colliery in central England remained a priority.
The coal miner, whose output is used to generate 5 percent of Britain's electricity, said the situation at Daw Mill had reached "crunch point" and continued operation was no longer sustainable. Miners are currently working through a geological fault, which means reduced output.
"The company has today commenced consultation on the potential closure of Daw Mill by early 2014 at the point when current and largely developed coal panels will have been mined," the firm said in a statement.
A "face gap" at Daw Mill in 2010, a hiatus between panels of coal when nothing could be mined for four months, burnt through most of the cash raised in 2009 in a 100 million pound ($157 million) equity issue.
Production at the mine, which dates back to the late 1950s, is currently 175,000 tonnes behind budget, unlike UK Coal's other mines, which it said were performing "broadly in line with expectations".
Daw Mill is one of UK Coal's three deep mines, employing more than a quarter of the group's 2,900 employees.
The company Coal said it would suspend developments at Daw Mill beyond the end of 2013 due to the low productivity, but could re-open the colliery or even extend the life of the mine under a lower risk operating model.
The miner said its restructuring plan at the deep mines, on top of its three-year recovery strategy, was aimed at isolating operating risk from each of them, in particular Daw Mill.
It has begun talks with stakeholders including the UK government, the Coal Authority, customers and pension trustees. It is also in talks with its banks, led by Lloyds, to address potential funding requirements.
"If the restructuring plan is successfully implemented in the interest of securing a more stable platform for the company, shareholders may face dilution of their holdings," it said.
Wednesday's news sent shares in the miner, which trades on the FTSE Small Cap index, down more than 30 percent in morning trade to their lowest level in over a decade. At noon, the stock was down 29 percent at 20.9 pence.