* Backs smaller Liberal Democrats due to Brexit stance
* Says May will "raise the drawbridge"
LONDON, June 1 (Reuters) - The Economist has dropped its support for Theresa May's Conservative Party, saying the British prime minister had been "found out" for being illiberal, indecisive and insular during the short election campaign.
Presenting itself as a champion of free trade "read widely in the corridors of power", the publication said May wanted to "raise the drawbridge" with her plan for a post-Brexit Britain which could starve the economy of the skills it needs.
Instead, the weekly title endorsed the smaller Liberal Democrats for the June 8 election as the only party showing the right attitude to Brexit and said it hoped the Lib Dems could in time form a new centrist party at the heart of British politics.
"She wanted the election campaign to establish her as a 'strong and stable' prime minister," the Economist said. "It has done the opposite."
"She relies on a closed circle of advisers with an insular outlook and little sense of how the economy works. It does not bode well for the Brexit talks. A campaign meant to cement her authority feels like one in which she has been found out."
While the Economist may not be a leading voice in Britain's heavily partisan newspaper industry, it has a circulation of around 1.5 million at home and overseas and is widely read by business leaders, many of whom campaigned against Brexit.
In 2015 it backed a continuation of the coalition that was in power from 2010, led by the Conservatives with support from the Liberal Democrats. It had backed the Conservatives in 2010 and last backed the main opposition Labour Party in 2005, when it was led by Tony Blair.
The Sun tabloid, Britain's top selling newspaper, has backed May's Conservatives while the Financial Times has also endorsed May but described her as "curiously brittle" and said her management style must change.
May, a former interior minister, became prime minister following Britain's shock vote to leave the EU a year ago.
She had argued in favour of remaining in the EU, but she kept a low profile during the campaign. Since becoming prime minister she has said she would take Britain not only out of the EU but also out of the single market trading bloc.
With exit negotiations imminent, she stunned almost everyone when she called a snap election in April designed to strengthen her hand in the talks, to win more time to deal with the fallout and to strengthen her grip on her party.
Initial polls put the Conservatives more than 20 points ahead of the opposition Labour Party, but she stumbled badly last month when she set out unpopular plans for elderly care, only to reverse the policy after days of bad headlines.
Her support has since dropped with some polls putting Jeremy Corbyn's Labour only 3 points behind as voters warm to his promise of renationalisation, higher public spending and tax rises for the rich.
The Liberal Democrats, which held nine of the 650 parliamentary seats before the election was called, are currently polling between 7 and 10 percent support.
"Both Mrs May and Mr Corbyn would each in their own way step back from the ideas that have made Britain prosper - its free markets, open borders and internationalism," the Economist said.
"They would junk a political settlement that has lasted for nearly 40 years and influenced a generation of Western governments. Whether left or right prevails, the loser will be liberalism."
May has previously praised free markets but said she will intervene in industries deemed to be dysfunctional.
The Economist is owned by Italy's Agnelli family, its staff and other investors including the Cadbury, Rothschild and Schroder families.
(Editing by Alison Williams)