The announcement deepened the sense of turmoil at the British outsourcer which has reported a string of profit downgrades, contract problems and scandals since 2013.

Shares fell as much as 35 percent, wiping some 600 million pounds off Serco's market capitalisation, with some analysts concerned that this might not be the end of the bad news.

Chief Executive Rupert Soames, who joined the firm that runs British prisons, Dubai's Metro and a huge array of other services in May, ordered a review of operations which, he announced on Monday, had found impairments and higher contract losses totalling 1.5 billion pounds.

Cutting the profit outlook for this year and next, Serco said there would be no final dividend for 2014 and announced a 550 million-pound rights issue for the first quarter of next year. It raised 160 million pounds via a share placing in April.

"Whilst it is a bitter pill, it is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco's future," Soames said in a statement.

Serco said it had begun talks with its lenders to amend terms as its debt levels were now close to the limit agreed with creditors of 3.5-times core earnings. In the medium term it said it would aim for a ratio of 1-2-times net debt to core earnings.

Profits tumbled after the British government banned it for six months from bidding on new work in July 2013 for overcharging on a deal to tag criminals.

It has also seen margins fall on other work at home and abroad, while a hunger for new deals has left it saddled with loss-making contracts as clients squeeze more out of providers.

"STRATEGIC BLUNDERS"

On Monday Serco said costs had risen on contracts such as one to transport prisoners in the UK and another providing maintenance services on Australian Navy boats.

Soames said Serco's focus would now return to delivering government services internationally in areas such as justice, defence and healthcare, instead of work in the private sector where poor acquisitions have hindered its success.

It will sell non-core businesses with revenues that total as much as 600 million pounds, including its global BPO arm which runs IT and customer services for private-sector firms.

"Serco’s new top team has bitten the bullet and revealed the full extent of Serco's over-optimistic accounting and strategic blunders," said Whitman Howard analyst Stephen Rawlinson.

"This news was expected but, we expect, the extent of the damage was not."

Other analysts noted that Serco's review of strategy, contracts and finances was on-going and would not be completed before March, meaning more bad news may still await.

In its fourth downgrade in a year, Serco cut its forecast for 2014 adjusted operating profit by 20 million pounds to 130-140 million -- less than half of the 314 million pounds it posted two years ago.

Adjusted operating profit for 2015 is expected to be 100 million pounds, it added, 31 percent below analyst forecasts.

Shares in Serco were down 30 percent to 220.9 pence at 1024 GMT, a 10-year low, valuing the firm at 1.2 billion pounds.

(Additional reporting by Li-Mei Hoang and Sarah Young; Editing by Jason Neely and Robin Pomeroy)

By Neil Maidment and Kate Holton