UPDATE 2-Sears prepares to file for bankruptcy as early as Friday -sources

(Adds background on September going concern warning, shares of REITs falling)

Oct 10 (Reuters) - Sears Holdings Corp is preparing to file for Chapter 11 bankruptcy protection as early as Friday, sources said on Wednesday, casting doubt over the future of what was once the world's largest retailer and sending its shares to a record low.

Negotiations between Sears Chief Executive Officer Eddie Lampert and the company's special board committee are at a standstill over the committee's refusal to approve Lampert's rescue plan, the sources said. The committee is concerned it will be opening the company up to litigation, one source said.

Once also the largest U.S. retailer, Sears sold everything from toys to auto parts to mail-order homes and was a key tenant in almost every big mall across the United States. It has suffered in the last decade because it did not specialize and was overtaken by online competition from Amazon.com Inc and other retailers.

Sears shares were down 36 percent at 37 cents. The stock, which traded above $100 a decade ago, has fallen to less than $1 in the past year.

It warned in September for a second time that it could go out of business, hurt by falling foot traffic at its brick-and-mortar stores as customers shift online.

The Wall Street Journal late Tuesday said Sears hired boutique advisory firm M-III Partners LLC to help prepare a bankruptcy filing before a $134 million debt payment comes due on Monday, citing people familiar with the matter.

Billionaire investor Lampert wants to restructure the debt without filing for bankruptcy protection because he views bankruptcy as risky for retailers, the paper said.

The Journal also reported Lampert, who has rescued the company in the past, could make the payment to avert an in-court restructuring. Sears had no comment on the report.

The Hoffman Estates, Illinois-based retailer has posted seven straight years of losses and its sales have not grown since the 2008 financial crisis.

Lampert, who also owns hedge fund ESL Investment Inc, proposed deals to reduce the company's debt load to $1.2 billion from $5.6 billion in September. Lampert and ESL are the company's two largest shareholders.

The Sears special committee is weighing a prior offer from Lampert to acquire the retailer's Kenmore appliances brand and its home services business for as much as $480 million. Sears warned it could go out of business as it waits for approval from the committee on the deal.

In another attempt to avoid bankruptcy, Sears last year sold its Craftsman tool brand to power tool maker Stanley Black & Decker for $900 million.

Sears acquired discount chain Kmart in an $11 billion deal engineered by Lampert in 2004.

Shares of real estate investment trusts (REIT) exposed to Sears properties also fell Wednesday. Seritage Growth Properties , which has master leases on 230 Sears stores, slid 5.5 percent, CBL & Associates Properties lost 1.6 percent and Pennsylvania REIT was down 1 percent.

(Reporting by Nick Zieminski in New York Editing by Chizu Nomiyama and Jeffrey Benkoe)