Billionaire investor Carl Icahn said on Tuesday he will offer to smaller holders of CIT Group's debt short-term protection against the value of the debt declining, if investors back his alternative restructuring of the beleaguered lender.

New York-based CIT is trying to restructure its debt by getting debtholders to exchange their notes or to agree to a prepackaged bankruptcy.

Icahn, who has bought up CIT debt in the past few months, has criticized CIT's restructuring plans and proposed alternatives. He said last week he has offered to underwrite a $6 billion loan to CIT.

On Tuesday Icahn said he would offer smaller debtholders, who he said have been shut out of negotiations, the option to sell their debt to him for 60 percent of their par value within 30 days of CIT's exchange failing, if they vote against CIT's proposed restructuring.

Our tender offer provides downside protection to those noteholders willing to stand up to the company and reject their plan in the face of the scare tactics being used by the company, he said in a release.

CIT's bonds declined on Tuesday. The company's 5.2 percent bond due 2010 fell almost one cent to 63.05 cents on the dollar, according to MarketAxess. Its stock fell almost 10 percent to 97 cents.

The company on Friday warned that if bondholders reject its proposed restructuring it would have to liquidate, which could dampen the recovery value of the bonds. CIT said its unsecured bonds would be worth somewhere between 6 cents and 37 cents on the dollar in this scenario.

Icahn, on the other hand, said CIT's proposed restructuring will destroy the value of the company and that the current Board of Directors should not be able to retain control of the company.

I believe that CIT's offer as currently structured provides no protection for noteholders going forward and is likely to result in the deterioration of value and business as usual for the current Board of Directors and management, he said.

Analysts at credit research firm CreditSights said opposition to the plan, including by Icahn, makes it unlikely that CIT's proposed exchange or prepackaged bankruptcy will be accepted.

It is also unlikely that the company would be able to turn around its business by growing deposits in its bank arm, even if its restructuring were successful, they said.

In our view, CIT, and bondholders, are better served if the company enters an orderly liquidation, CreditSights said in a report late on Monday.

CIT on Monday extended and sweetened its debt exchange offer to some of its bondholders in an effort to get more participation.

(Reporting by Karen Brettell; Editing by Chizu Nomiyama)