Countrywide Financial Corp shares fell as much as 9.2 percent on Wednesday after the largest U.S. mortgage lender was downgraded to sell from buy by a Merrill Lynch & Co. analyst, who said bankruptcy may be possible if liquidity worsens.

The downgrade by analyst Kenneth Bruce came a day after Calabasas, California-based Countrywide said foreclosures and mortgage delinquencies in July had risen to their highest levels since at least early 2002. That helped send Countrywide shares down 8.1 percent.

If enough financial pressure is placed on Countrywide, or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency, Bruce wrote, according to a person who has seen the report. If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt.

Countrywide did not immediately return a call for comment.

Merrill Lynch spokeswoman Carrie Gray declined to provide the report or confirm its contents.

Through Tuesday, shares of Countrywide had fallen 42 percent this year, compared with a 24 percent decline in the KBW Mortgage Finance Index.

Lenders are struggling as defaults rise, investors refuse to buy many kinds of home loans, and bankers curtail lending to mortgage providers.

Countrywide this month has tried to defuse market worries about its liquidity. It has said it had access to $186.5 billion of cash as of June 30, including $46.2 billion of highly reliable short-term financing. Chief Executive Angelo Mozilo has said Countrywide expects to add market share as the industry consolidates and weak rivals disappear.

Bruce, however, said industrywide liquidity problems could erode the value of Countrywide's franchise.

The acceleration of margin calls and forced asset sales in the capital markets could lead to more problems for Countrywide to finance its mortgage operations, he wrote, according to the person who saw the report. Should a liquidity event occur, for which the likelihood is increasing, Countrywide shares would probably witness further selling pressure.

The shares were down 10 cents at $24.36 in morning trade on the New York Stock Exchange after earlier falling to $22.21. They began the year at $42.45.

The perceived risk of owning Countrywide bonds rose. Credit default swaps rose 66 basis points (0.66 percentage point) to 434.5 basis points, or $434,500 per year for five years to insure $10 million of debt, according to CMA DataVision.

(Reporting by Jonathan Stempel; Additional reporting by Karen Brettell)