LONDON, June 3 (Reuters) - Britain's Thames Water said

U.S. private equity firm KKR had pulled out from a plan

to invest billions of pounds into the embattled utility, putting

its fight to avoid financial collapse back into focus.

The company, which is Britain's biggest water supplier

with 16 million customers, has been struggling with huge debts,

and was banking on KKR investing over 3 billion pounds of new

equity to keep it operating.

"KKR has indicated that it will not be in a position to

proceed," Thames Water said in a statement on Tuesday.

Chairman Adrian Montague said on Tuesday that the

development was "disappointing" and that the company would now

proceed with discussions with senior creditors', who have put

forward their own alternative plan for the company.

Thames Water could face temporary government

nationalisation if it fails to recapitalise.

The company is at the centre of a public backlash

against the water sector which is blamed for polluting Britain's

river and seas while also hiking bills.

An overhaul of the way the industry is regulated was

proposed by a government-commissioned review in its interim

report published on Tuesday.