UPDATE 3-Tesla grapples with impact of battery fire in U.S.
* Stock fall shaves $2.4 billion off market value
* Incident will not dent long-term demand for Tesla -analysts
* Industry needs better rules to protect EV batteries -consumer advocate
* Model S received 5-star crash ratings from NHTSA
(Adds details of deal in Virginia, closing stock price)
DETROIT, Oct 3 (Reuters) - Two days after a video of a burning Tesla electric car went viral, the "green car" maker grappled with ways to contain the damage as investors shaved $2.4 billion off the company's market value.
Tesla Motors Inc has confirmed that the car caught fire after the driver ran over a large metallic object on Tuesday morning just south of Seattle, causing extensive damage to the front end of the Model S sedan. Emergency officials at the accident said the fire occurred in the electric vehicle's lithium-ion battery.
It was the latest in a string of problems for lithium-ion batteries, which are used heavily in EVs sold by various automakers. However, the battery fire was the first for Tesla, the California-based EV maker founded by billionaire Elon Musk.
The fire and resulting publicity sparked a PR nightmare for a company that only makes electric cars, as opposed to mainstream automakers like General Motors Co that derive only a small percentage of sales from EVs, analysts said.
"The bar is much higher for Tesla," said James Albertine, analyst at Stifel, Nicolaus & Co, who has a "hold" rating on Tesla shares.
"Tesla cannot weather a sustained onslaught of consumer complaints and incidents that could potentially dent the demand curve for the next vehicle."
Before the incident, Tesla's stock had soared almost sixfold this year. On Thursday Tesla shares fell 4.2 percent to close at $173.31 on the Nasdaq. That came on top of a 6.2 percent drop on Wednesday.
The video of the burning car was posted online at auto blog Jalopnik and has been widely disseminated by other media.
"Tesla's a very controversial stock and this will give fodder for the bears. They'll say this is going to slow down sales," said R. W. Baird analyst Ben Kallo. On Wednesday, he downgraded the stock to "neutral" for valuation reasons.
He said he saw the fire hurting sales slightly, but he and other analysts still expected strong demand going forward.
This is not the first battery fire in an electrified vehicle, as it followed cases in GM's Chevrolet Volt and Mitsubishi's i-MiEV. Boeing Co also dealt with lithium-ion battery fires in its new Dreamliner plane earlier this year.
Analysts pointed out that warnings inside the Model S in the Washington incident alerted the driver in plenty of time to pull over and exit, and that the fire never entered the vehicle's interior cabin.
Given that Tesla's Model S and the discontinued Roadster have been driven a combined 113 million miles and that this was the first battery fire, the company's rate of catching fire was still only one-tenth the frequency of conventional car fires, Wedbush Securities analyst Craig Irwin said. He has a "neutral" rating on the stock.
Tesla officials said the battery and the car worked as designed, keeping the fire under control and allowing the driver time to pull over and safely exit the vehicle.
"The fire was caused by the direct impact of a large metallic object to one of the 16 modules within the Model S battery pack," Tesla spokeswoman Elizabeth Jarvis-Shean said.
"Because each module within the battery pack is, by design, isolated by fire barriers to limit any potential damage, the fire in the battery pack was contained to a small section in the front of the vehicle," she added.
The incident report filed by the fire department in Kent, Washington, described how firefighters put out the blaze, only to see it then reignite under the car. The report also said that water seemed only to intensify the flames. Firefighters then used a dry chemical extinguisher to douse most of the fire in the battery pack in the front end of the vehicle.
Analysts for research firm Kelley Blue Book said the road debris likely compromised the vehicle's cooling system, leading to the fire. They also said the current shutdown of the U.S. government would hamper any investigation.
Clarence Ditlow, executive director for the Center for Auto Safety, said there was a "design issue" with the Tesla battery if an object striking the bottom of the car could lead to a fire. The head of the consumer watchdog group called on U.S. safety regulators to set industry standards, including additional protection under the battery packs in EVs.
Tesla's battery pack is made up of small lithium-ion battery cells that are also used in laptop computers, an approach not used by other automakers. The battery pack stretches across the base of the vehicle. In comparison, GM uses large-format battery cells in a T-shape in the center of the Volt.
Panasonic Corp, which supplies the batteries used in the Model S, declined to comment on Thursday.
SHIFT TO LITHIUM-ION
The auto industry has been increasingly shifting toward lithium-ion batteries as opposed to the less expensive but heavier nickel-metal hydride battery which is still in use by Toyota Motor Corp in its top-selling Prius.
GM, the largest U.S. automaker, uses a lithium-ion battery in its Chevrolet Volt plug-in hybrid, while smaller U.S. rival Ford Motor Co uses the same technology in its green cars, including the C-Max hybrid.
The technology is favored in the latest generation of such cars because the batteries can be made lighter, smaller and in a way that retains capacity longer. Lithium-ion batteries are about half the weight of nickel-metal hydride batteries.
Still, the Tesla fire was more bad news for a technology that was already the object of some concerns, said Albertine, the analyst at Stifel.
The Model S is one of the most popular pure electric vehicles in the United States, with an estimated 14,300 sales for the year through September. The hybrid Volt is powered by both an electric battery and a gasoline engine.
In August, the Model S won a five-star safety rating from the U.S. National Highway Traffic Safety Administration in every testing category. The Model S also has the highest rating given by influential magazine Consumer Reports, with a score of 99 out of 100 points.
Irwin, the Wedbush analyst, said the fire will be a "learning opportunity," allowing Tesla to make potential design changes for the Model X, a crossover derivative of the Model S coming next year, and the so-called Gen 3 models, a new family of battery-powered compacts priced from around $35,000.
Also on Thursday, Tesla said it had reached a deal with the Virginia Department of Motor Vehicles and the Virginia Auto Dealers Association that will allow it to sell cars directly to consumers from a company-owned store in northern Virginia.
Dealer groups in several U.S. states have fought Tesla's efforts to avoid the traditional franchise dealership structure.
(Additional reporting by Paul Lienert, Deepa Seetharaman and Bernie Woodall in Detroit, and Yoko Kubota in Tokyo; editing by Maureen Bavdek, Jeffrey Benkoe and Matthew Lewis)