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UPDATE 2-Profit runs dry at Australia's GrainCorp as drought withers crops

* GrainCorp swings to A$48 mln half-yearly loss

Comes after severe drought hits grain production

* Shares mark lowest since late November (Adds comment, market reaction)

By Tom Westbrook

SYDNEY, May 9 (Reuters) - Australia's biggest listed bulk grain handler, GrainCorp Ltd, on Thursday reported a larger-than-expected half-yearly loss, as severe drought withers crops in one of the world's top exporters of commodities such as wheat.

The firm also cut its dividend as it grapples with the fallout from the driest conditions in a century, with its shares falling to their lowest level in five months.

The company last month flagged that the prolonged drought would hit its earnings, but the loss was deeper than anticipated by analysts.

The results follow news this week that a suitor had withdrawn its A$2.4 billion ($1.7 billion) takeover bid for GrainCorp after months of due diligence.

"(The loss) highlights ... truly how difficult this drought has been for them," said Sean Sequeira, chief investment officer at Alleron Investment Management, a fund manager that has so far avoided GrainCorp shares owing to their volatility.

"(The result) increases the risk-profile on the company."

GrainCorp posted a A$48 million after-tax loss for the six months that ended on March 31, eight times bigger than Macquarie Bank analysts had expected and well under the A$36.1 million in profit it reported for the same last year.

Shares in GrainCorp fell almost 7 percent in early trade to hit a five- month low, before paring some of those declines. The broader market rose half a percentage point.

'VERY DISAPPOINTING'

GrainCorp is in the middle of a demerger, separating grain processing from its malting works, seeking to make each a more attractive purchase prospect. It is also exploring an insurance deal to smooth out the volatility of its agriculture exposure.

The firm says it remains "actively engaged" with interested buyers.

"Very disappointing, but very much primarily around what's happened in east coast Australia in terms of the drought - the worst (production) we've seen in over a decade," GrainCorp's Chief Executive Officer Mark Palmquist told analysts on a conference call.

The company predicts another lean year, forecasting eastern Australia's winter wheat harvest at half 2018's disappointing crop, with the summer harvest falling as well.

It did not declare a dividend for the half-year, citing the challenging conditions. It had paid 8 cents per share as interim dividend last year. ($1 = 1.4304 Australian dollars) (Reporting by Tom Westbrook in Sydney; Additional reporting by Paulina Duran in Sydney, Rashmi Ashok and Shriya Ramakrishnan in Bengaluru; Editing by Shounak Dasgupta, Anil D'Silva and Joseph Radford)