BP under pressure as U.S. threatens over spill

LONDON/VENICE, Louisiana (Reuters) - Pressure on BP intensified on Thursday as the U.S. sought to extract more money to pay for the Gulf of Mexico oil spill and Britain's Prime Minister said he "understood" U.S. frustration.

Shares in the British oil company sank to their lowest since 1997 in London trading on Thursday, catching up with a sharp fall in the U.S., before bouncing off their lows as U.S. trading prepared to start.

The cost of insuring BP's AA-rated debt traded for a time at levels normally associated with "junk" status.

Business leaders urged Britain to defend BP -- the biggest single payer of dividends among UK listed companies -- against the U.S. threats.

"It's a matter of concern when politicians get heavily involved in business in this way," Richard Lambert, head of the CBI, the leading British business lobby group, said in an emailed statement.

But Prime Minister David Cameron said, "This is an environmental catastrophe. BP needs to do everything it can to deal with the situation, and the UK government stands ready to help. I completely understand the U.S. government's frustration."

Earlier on Thursday a British government spokesman said Cameron would talk to President Barack Obama on the subject over the coming weekend in their first discussion since speaking when Cameron took power in May.

Obama and other government officials on Wednesday ratcheted up the pressure on BP, with direct calls for wider financial responsibility and a threat to try and stop shareholder payouts.

The U.S. Justice Department said it was concerned whether BP and other companies involved in the well had enough funds to cover damages and was considering taking action.

"We want to ensure that these companies have funds available to compensate the taxpayers, the individuals harmed throughout the Gulf, the families of the individuals who were killed or who have been injured," U.S. Associate Attorney General Thomas Perrelli told the House Transportation and Infrastructure Committee at a hearing.

"So, we are looking very closely at this, and we are planning to take action," Perrelli said in response to a lawmaker's question on whether the Justice Department had the ability to issue an injunction to stop BP from paying its dividend.

Meanwhile, U.S. Interior Secretary Ken Salazar told a Senate hearing he would seek to make BP responsible for workers laid off because of the six-month moratorium on deepwater exploratory drilling imposed by the government after the spill.

With polls showing public disapproval over Obama's handling of the worst oil spill in U.S. history, the prospect of new government penalties has sapped investor confidence in BP.

After Wednesday's battering in New York, BP has lost more than half its market value since the crisis began on April 20 when the deepsea well ruptured and the Deepwater Horizon rig exploded, killing 11 workers and unleashing a torrent of oil.

BP shares opened trading in London 11 percent down before recovering to trade down 6.8 percent at 365 pence at 1:30 p.m., one day after BP depositary shares plummeted to a 14-year low in New York.

"BP notes the fall in its share price in U.S. trading last night. The company is not aware of any reason which justifies this share price movement," BP said in a statement.

BP said it had the financial flexibility to deal with liabilities related to the spill, which to date had cost it around $1.43 billion (977 million pounds).

Restructuring experts agree that by running the numbers alone, BP looks able to handle the financial damage.

A fresh round of congressional hearings into the oil spill was scheduled on Thursday in Washington as BP sought to capture more of the oil gushing into the Gulf of Mexico.

BP's latest containment effort, which follows a series of earlier failed attempts, involves placing a containment cap with a seal on a deepsea pipe from which the oil is gushing. It said on Wednesday it was capturing more of the oil, though the exact flow rate remains unknown.

SHOWDOWN?

As the U.S. government turned up the heat, a BP source said the company believes it may be heading for a showdown with the White House over widening liability demands.

While the company has said it will pay for the clean-up and direct damages to those affected by the spill, the moratorium on drilling was a government decision and costs related to it were a different matter, the source said.

There were visible signs of anger in Louisiana, where fishing bans are taking a heavy toll on the local economy.

At Maw's Sandwich and Snack Shop in Boothville, Louisiana, where French fries smothered in gravy are on the menu, a poster said "Obama Needs A Lesson In Leadership And Compassion."

Images of oiled pelicans and other wildlife are further stoking public anger with both the U.S. government and BP.

(Additional reporting by Alex Chambers in London, Michael Erman in New York, Tom Hals in Wilmington and Ed Stoddard in Dallas; writing by Andrew Callus, editing by Will Waterman)