H&R Block Inc, the largest U.S. tax preparer, said it was trying to renegotiate the sale of its Option One Mortgage Corp unit and would get out subprime lending after its quarterly loss more than doubled.

The company said on Thursday that it might shut down Option One's lending operations and sell only its loan servicing business to private equity firm Cerberus Capital Management LP. If talks fail, it said, there can be no assurance any sale will occur.

Losses at Option One contributed to an overall loss of $302.6 million, or 93 cents per share,for the first quarter ended July 31, up from $131.4 million, or 41 cents a share, a year earlier.

The mortgage origination market is in the midst of the most severe dislocation that it has seen in years, maybe the most severe since the 1930s, Chief Executive Mark Ernst said on a conference call. That decade included the Great Depression.

H&R Block shares were unchanged at $19.50 in morning New York Stock Exchange trade after earlier falling as low as $18.47.

Subprime lenders make loans to people with poor credit histories. Dozens of these companies the industry this year as rising borrowing costs and stagnant home prices led to more defaults, while tight capital markets have deprived lenders of needed cash.

The H&R Block announcement comes as another private equity firm, Lone Star Funds, is trying to cancel its planned $400 million purchase of subprime lender Accredited Home Lenders Holding Co.

CLOUDS

Mounting losses at Option One and concern about prospects for the unit's sale helped push H&R Block shares down 15 percent this year through Wednesday.

Some shareholders have demanded that the Kansas City, Missouri-based company get out of mortgage lending and banking.

Activist shareholder Richard Breeden, a former U.S. Securities and Exchange Commission chairman, is seeking three board seats at H&R Block's Sept. 6 annual meeting.

Until the clouds lift, there's continued investor concern that these distractions keep the company from optimizing results in its core tax business, said Thomas Russo, a partner at Gardner, Russo & Gardner in Lancaster, Pennsylvania. The firm invests more than $3 billion and owns H&R Block shares.

H&R Block had agreed in April to sell Option One to New York-based Cerberus for an estimated $1 billion. Ernst said the servicing business remained quite valuable.

Excluding $192.8 million of losses at Option One and two discontinued businesses, H&R Block's quarterly loss was $109.8 million, or 34 cents per share, compared with $117.8 million, or 36 cents a share, a year earlier.

On that basis, analysts expected a loss of 35 cents per share, according to Reuters Estimates.

Revenue rose 11 percent to $381.2 million.

H&R Block often loses money in quarters that don't include the main U.S. tax filing season, which ends in April.

Quarterly pretax losses were $172.3 million in tax services and $1.9 million in business services, while consumer financial services, including H&R Block Bank, posted a $6.2 million profit.

SUPPORT FOR BREEDEN

H&R Block is seeking to waive requirements that Option One fund $2 billion of loans within 60 days of closing and have at least $8 billion of warehouse credit lines. It is also trying to close before Dec. 31, when the merger agreement expires.

Ernst said Option One would now make only loans eligible for purchase and guarantee by mortgage companies Fannie Mae and Freddie Mac, which investors consider safer.

The new guidelines mean Option One may make only $200 million of loans a month, H&R Block said. It made $29.8 billion of subprime loans last year, according to National Mortgage News.

A Cerberus spokeswoman declined to comment.

Breeden was not immediately available for comment. His bid for board seats has won backing from the three largest proxy advisory firms and at least three major H&R Block shareholders.

H&R Block narrowed its forecast for fiscal 2008 earnings per share from continuing operations to a range of $1.30 to $1.45 from a prior outlook of $1.25 to $1.45. Analysts on average expected $1.33.

The company does not expect to buy back stock before next May. (Additional reporting by Dan Wilchins)

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