UPDATE 1-Capita loses out on criminal records contract

* Says Home Office to select alternative supplier

* Capita to sign interim extension beyond 31 March 2013

* Shares down 2 pct, biggest FTSE100 faller

(Adds details, background, shares)

LONDON, Oct 3 (Reuters) - British outsourcing firm Capita

said it had lost out on a new government contract to runcriminal record checks after the Home Office pursued talks witha rival supplier.

Capita, which has been running the Criminal Recordsdisclosure service for over 10 years in a contract worth around400 million pounds ($650 million), had been shortlisted tosupport the coalition government's new Disclosure and BarringService (DBS).

"Capita is disappointed not to have been selected by theHome Office to support DBS," it said in a statement onWednesday. "We will now work with the CRB, and its new partner,to enable the smooth transfer of the service."

There was no immediate response from the Home Office on theidentity of the winning supplier.

Capita shares, which started the day 18 percent up on threemonths ago, were down 2 percent to 760 pence in heavy trade at1114 GMT, the biggest FTSE100 faller.

Espirito Santo analyst David Brockton said the market hadhalf expected bad news for Capita after the contract award wasdelayed in June.

"We remain cautious on Capita as we believe there will begreater competition for back office outsourced solutions, assupported by the fact that another supplier has been favoured towin the DBS contract."

The DBS is the merger of the Criminal Records Bureau, whichhelps employers make safer recruitment decisions, and theIndependent Safeguarding Authority, which prevents unsuitablepeople from working with vulnerable groups, including children.

Capita said pending the finalisation of a full handover ofthe services to the new supplier the CRB would extend itscontract with the firm beyond the current expiry date of March31, 2013.

In July Capita, whose contracts range from managing over 21million life and pension policies to providing radios forBritain's emergency services, posted a 10 percent rise in firsthalf profit and said work with central and local government waspiling up.($1 = 0.6196 British pounds)

(Reporting by Neil Maidment, additional reporting by StephenAddison, Editing by Rosalba O'Brien)

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