UPDATE 2-German retailer Praktiker files for insolvency
* Labour union says insolvency is a "human tragedy"
* Shareholder says investors wanted more collateral
* Shares down 63 percent
(Recasts following insolvency filing, adds shareholder, shopper, industry expert)
FRANKFURT, July 11 (Reuters) - German home-improvement chain Praktiker filed for insolvency on Thursday after talks with creditors failed, sending its shares into freefall and sparking fears of heavy job losses.
Germany's retail industry has had a rough ride during the economic downturn as consumers in Europe's biggest economy, who tend to save a large part of their earnings, kept a tight rein on spending.
Germany's third-biggest home improvement store chain and a household name in the country, Praktiker struggled to recover from a short-lived attempt to go up-market and row back on its popular "20 percent off everything" promotions.
A long winter compounded its problems, driving down first-quarter sales by 10 percent. Praktiker has about 20,000 workers.
Praktiker's woes risk dampening the mood among consumers ahead of an election in September in which Chancellor Angela Merkel is expected to win a third term, in part thanks to the relative strength of the German economy.
"To tell you the truth, I'm not surprised by the news," said Johannes Kraemer, a 60-year-old screenwriter and film director, who was shopping at a Praktiker outlet near Frankfurt where products ranging from toilet bowls to inflatable pools were being offered at deep discounts.
"Now I've come to pick over the bones, just like everyone else," he said.
Germany's retail sector was rocked last year by the collapse of drugstore chain Schlecker, which left 13,200 employees out of work, as well as the insolvency of mail order company Neckermann.
The Hamburg court where Praktiker submitted its filing on Thursday will name an insolvency administrator who will then devise an insolvency plan. The filing does not affect Max Bahr-branded stores or Praktiker's international business.
Labour union Verdi said Praktiker's downfall was "a human and existential tragedy" for its employees, who had offered to take pay cuts to help rescue the company.
Praktiker's shares, which once traded at almost 32 euros, were down 69 percent at 0.116 euro by 1318 GMT.
Praktiker's 414 stores, about three quarters of them in Germany, posted 2012 sales of 3 billion euros ($3.86 billion) but generated an annual loss of 188.9 million euros.
Using money obtained from a capital increase and new investors last year, Praktiker had been converting some of its cheaper Praktiker stores to the higher-end Max Bahr brand, which had been more successful.
"Switching horses in mid-gallop is dangerous, even if the new horse is better," said Thomas Roeb, retail expert at the Bonn-Rhein-Sieg University of Applied Sciences.
Praktiker had also counted on cash from the sale of a unit in Luxembourg, which fell through and left it underfunded.
Extension agreements and the release of collateral helped Praktiker stay afloat until the end of June but then it failed to obtain further financing, according to an internal memo Praktiker sent to its employees, which was seen by Reuters.
Sources told Reuters a credit insurer withdrew protection earlier this week, and Praktiker sought an urgent cash injection of 30-35 million euros ($38.6-45 million).
Praktiker's biggest shareholder Donau Invest, with a stake of almost 10 percent, joined with other investors to round up about 40 million euros for Praktiker.
"The problem was that we and of course other investors wanted a certain amount of collateral," Austria-based Donau Invest's chief Alain de Krassny told Reuters.
Crucially, Praktiker's major creditors, which include Commerzbank, were not on board for such a deal, according to Praktiker's internal memo.
Praktiker aims for its business to be restructured as part of the insolvency proceedings, which could include agreements with suppliers and creditors or the closure or sale of businesses.
Tengelmann, the owner of Germany's No. 1 home improvement store chain OBI, said on Thursday it had no interest in taking over Praktiker but could look at buying individual stores.
The CEO of Tengelmann, Karl-Erivan Haub, compared Praktiker's discount strategy to a drug addiction.
"You had to keep taking more in order to get a kick," he said. ($1 = 0.7778 euros)
(Additional reporting by Victoria Bryan, Matthias Inverardi, Natalia Drozdiak, Angelika Gruber and Sabine Wollrab; editing by Marilyn Gerlach and Tom Pfeiffer)