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 run criminal record checks after the Home Office pursued talks with a rival supplier.

Capita, which has been running the Criminal Records disclosure service for over 10 years in a contract worth around 400 million pounds ($650 million), had been shortlisted to support the coalition government's new Disclosure and Barring Service (DBS).

"Capita is disappointed not to have been selected by the Home Office to support DBS," it said in a statement on Wednesday. "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 the identity of the winning supplier.

Capita shares, which started the day 18 percent up on three months ago, were down 2 percent to 760 pence in heavy trade at 1114 GMT, the biggest FTSE100 faller.

Espirito Santo analyst David Brockton said the market had half expected bad news for Capita after the contract award was delayed in June.

"We remain cautious on Capita as we believe there will be greater competition for back office outsourced solutions, as supported by the fact that another supplier has been favoured to win the DBS contract."

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

Capita said pending the finalisation of a full handover of the services to the new supplier the CRB would extend its contract with the firm beyond the current expiry date of March 31, 2013.

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

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

((neil.maidment@thomsonreuters.com)(+44)(0)(207 542 2292)(Reuters Messaging: neil.maidment.thomsonreuters.com@reuters.net))

Keywords: CAPITA/