Fears oil may continue spewing into the Gulf of Mexico for another two months into the hurricane season wiped $23 billion off BP's market value on Tuesday and sent the cost of protecting its debt soaring.

Once Britain's biggest company and one of the largest oil firms in the world, BP's debt is AA rated -- close to the highest rating given to non-sovereign bonds. However, traders of debt derivatives pushed the perceived risk of default out to a level similar to that of a much smaller oil company, such as Spain's Repsol, or one of Europe's weakened banks.

Analysts also cited rising takeover speculation, although they said reputational damage and the unknown financial cost of the spill would deter suitors for the moment.

BP could now be easy prey having lost over a third of its market value or 46 billion pounds ($67 billion) in six weeks.

Given the collapse in the share price and the potential for it to fall further we expect that it (BP) could become a takeover target - particularly if its operating position in the U.S. becomes untenable, said Dougie Youngson, analyst at Arbuthnot Securities.

Shares in BP fell close to 17 percent on Tuesday, hitting their lowest point in over a year as the London market opened for the first time since the failure of its latest attempt to stem the biggest oil spill in U.S. history.

The drop meant the British oil group was worth about 77 billion pounds versus 93 billion on Friday and 123 billion pounds prior to a rig explosion in April that killed 11 workers and unleashed oil from a well head one mile down.

The cost of protecting the company's debt against default rose sharply, with five-year BP credit default swap widening by 71 basis points to 173 basis points.

BP on Tuesday outlined plans for another, riskier attempt to contain the spill but the failure over the weekend of the top kill option to plug with well with heavy fluids meant attention was increasingly switching to the drilling of two relief wells, which won't stop oil leaking until August.

Last weekend's operations for me were really the last opportunity for them to kill the well and what they're proposing to do next has a real potential for making the situation worse, said Youngson.

BP now hopes to deploy a containment cap later this week and pipe leaking oil up to the surface. The latest plan is risky because it involves cutting pipes which are damaged, and whose damage is currently limiting the flow of oil into the sea.

AUGUST FEAR

BP's ultimate plan for stopping oil leaking is through two relief wells which it started drilling in May but which won't reach the right depth until August.

The word August is getting used quite a lot now by the BP management, said Alan Sinclair, analyst at Seymour Pierce.

Two more months of oil leaking into the Gulf would worsen the environmental catastrophe, as might hurricane season which began on Tuesday, raising the risk of more oil being driven ashore and clean-up efforts being disrupted.

The total financial cost of the response now stands at $990 million, up from a $930 million estimate on May 28 while almost 46 billion pounds has been wiped off BP's market value so far.

Although we believe that the market has overreacted to the bad news, we feel that there will be little stimulus to the shares while the leak continues to pump oil into the sea, said Panmure Gordon analyst Peter Hitchens.

Shares in BP were down 15.4 percent to 418.75 pence at 1050 GMT having earlier fallen to 411.50 pence and their lowest point since March 2009. Britain's index of blue chip companies was down 2.2 percent.

(Editing by Paul Hoskins and Andrew Callus)

($1=.6852 Pound)

Oil Spill United kingdom