LONDON, July 15 (Reuters) - The financial future of

Britain's biggest water firm, Thames Water, looks increasingly

uncertain in the wake of new pricing and spending limits laid

out by regulator Ofwat, according to investment bank JPMorgan.

Britain's regulator told water companies last week they

needed to fix leaks and cut sewage spills without raising bills

as much as they had wanted, as a mounting financial crisis in

the sector poses a test for Britain's new Labour government

which has pledged to reform the industry.

Analysts at JPMorgan said they were concerned that Ofwat's

tough stance on financial resilience may increase balance sheet

risks in the UK water sector and that Thames was now facing

particular risks.

"Overall, our level of concern about Thames Water's

financial position is at new highs, and we are unsure if Thames'

situation can be resolved without a disruptive outcome for

creditors," they wrote in a note published on Monday.

Britain's water industry has been in the firing line over

the amount of sewage dumped in its rivers and seas, with critics

saying the companies have under-invested for decades while

taking out billions of pounds in dividends, piling up debt and

paying large bonuses to executives.

JPMorgan described Ofwat's ruling that Thames should raise

customer bills by 23% rather than the 39% it had been asking

for, and that it should increase its total expenditure by far

less than it had requested, was "broadly unfavourable".

It means the firm must now make "material revisions to its

business plan, adjusting spending based on lower revenue

recovery and slower asset base growth".

More broadly it needs to address what Ofwat described as

an "inadequate" business plan rating, which ultimately drove the

regulator to put Thames into a special 'turnaround oversight

regime' (TOR).

For Thames to exit the regime it must demonstrate major

improvements in operational and financial performance.

To help achieve this, Ofwat is suggesting that Thames

consider: (i) a stock market listing, or (ii) a corporate split

into two or more companies.

"Needless to say, the implications of Thames being in a TOR

are materially negative," JPMorgan's analysts said, describing

it as "overly intrusive regulation" likely to add to the

company's pressures.

"We think its unlikely that Thames can exit the TOR

naturally, meaning extreme outcomes like splitting the company

are more likely," they said.