Casino said that an expected improvement in its operating performance in France in 2016 and the scale of its divestment plan would help strengthen its financial structure.

A strong liquidity position would also enable Casino to meet all its debt repayments in coming years, the company said in a statement.

The credit rating agency on Jan. 15 placed Casino's long-term 'BBB-' and short-term "A3" debt ratings on credit watch, saying it may lower the long-term ratings "by not more than two notches".

The warning from S&P comes as another blow for Casino, which has been in the crosshairs of Muddy Waters since December when the research and investment firm said the retailer was "dangerously leveraged", used financial engineering to mask a deteriorating core business, and was only managed for the short-term..

"This comes only a month after S&P affirmed the company's ratings - a stunning reversal," Muddy Waters said in an email to Reuters.

"S&P is recognizing the conflict of interest between Rallye and Casino, and that Casino is going to pay dividends in order to service Rallye's huge debt load; however, the best use of this cash would be to pay down Casino's own debt."

S&P said in its report it would also re-evaluate the impact of Casino's ownership by leveraged parent Rallye, which S&P said "further restricts Casino's financial flexibility given the need to upstream dividends to service Rallye's net debt".

Rallye owns 48.4 percent of Casino and depends on dividends from Casino to service its 2.4 billion of net debt. Rallye's majority shareholder is Fonciere Euris, which in turn is owned by Finatis, both of which also have their own debt to service.

Casino launched a 2 billion euro ($2.18 billion) disposal plan last month that was increased to around 4 billion with the planned sale of Thai subsidiary Big C.

Thailand's largest retail conglomerate Central Group is keen to bid for Casino Group's Thai and Vietnam operations, a company executive said.

The plan is aimed at substantially reducing Casino's debt by the end of this year. It stood at 7.55 billion euros at the end of 2014.

(Reporting by Dominique Vidalon; Editing by James Regan and Anand Basu)

By Dominique Vidalon