By Jeremy Pelofsky

WASHINGTON (Reuters) - WorldCom Inc. WCOME.O edged closer to bankruptcy on Monday after the company said it was delving deeper into its accounting history and bankers declared the company to be in default of loan agreements.

The Nasdaq market said it would delist WorldCom's stock on Friday unless the company appeals and the U.S. government began an inquiry into whether WorldCom would be barred from future contracts.

The No. 2 U.S. long-distance carrier, mired in one of the largest accounting scandals in U.S. history, was sued last week by the Securities and Exchange Commission for fraud in covering up $1.22 billion in losses by improperly accounting for $3.85 billion in expenses.

"Bankruptcy could be much sooner than we expected; in a matter of weeks if not less," Guzman & Co. analyst Patrick Comack told Reuters. "Their balance sheet is going to be in a lot worse state."

A WorldCom spokeswoman declined to comment on the possibility of imminent bankruptcy.

The company told securities regulators on Monday that it was probing further back into its financial records to examine how it handled its reserves for 1999 and 2000.

Lenders also declared the company in default of $4.25 billion in loans and could demand immediate repayment, WorldCom said in a statement. It also lost a $1.5 billion program that allowed WorldCom to borrow against payments owed by customers.

The Clinton, Mississippi-based company has been trying to negotiate new lines of credit, up to $5 billion, but entering bankruptcy protection might help the company regroup.

"We believe in a bankruptcy proceeding that they can successfully restructure and continue as a going concern, but clearly it's a fragile situation with a number of potential outcomes," said Tim Ghriskey, senior partner with Ghriskey Capital Partners, an investment management firm.

Shares of WorldCom, trading for the first time since last week when they were halted on news of the accounting scandal, plummeted more than 92 percent on Monday to 6 cents from 83 cents, and the stock broke its own single-day record set for the number of shares trading hands, over 1.3 billion. The previous record was 670.5 million shares.

WorldCom's woes have raised ire among lawmakers, who plan to hear on July 8 from company executives, including WorldCom Chief Executive John Sidgmore and Chairman Bert Roberts testifying before the U.S. House Financial Services Committee.

WorldCom, topping a string of corporate scandals, has also garnered the attention of President Bush, who plans a major speech July 9 on better corporate behavior.

FACING BANK CUT OFF

WorldCom's woes worsened on Monday when it revealed that its lenders of two separate lines of senior unsecured credit, totaling $4.25 billion, have declared the company in default. WorldCom said the move was expected.

"These notifications were anticipated," said Sidgmore. "We are engaged in discussions with lenders regarding replacement facilities and remain optimistic that our good working relationships will ultimately reach a positive resolution."

Lenders that hold 51 percent of one of the lines of credit could require immediate repayment, WorldCom said. It has drawn down $2.65 billion of the $4.25 billion credit lines.

The company also said it has received a termination notice for a $1.5 billion program that secures accounts receivable and that it will use collections on the accounts to pay $1.2 billion outstanding.

"I'm concerned that their accounts receivable program has been terminated," said Guzman & Co.'s Comack. "It means that bankruptcy is imminent."

Additionally, the Nasdaq National Market has advised WorldCom that its two tracking stocks, WorldCom Group and MCI Group, will be delisted on Friday for failing to comply with listing requirements. The company could stave off such a blow temporarily if it appeals the notice.

WORLDCOM REPORT TO SEC

WorldCom said Monday in a sworn statement to the SEC that questions have now been raised about "material reversals of reserve accounts during 2000 and 1999."

"No conclusion has been reached regarding these entries," WorldCom General Counsel Michael Salsbury said in the sworn statement demanded and released by the securities regulator.

"We will continue to be proactive in reviewing our operations and reporting our findings," Sidgmore said. A company spokeswoman declined to elaborate.

Theories abounded on what questions have been raised about the reserve accounts, including whether the company held earnings in reserve to make future periods look better, known as "cookie jar" reserves, or taking too big of a charge for acquisitions and bad debt and then later reversing the charge.

"Now we don't know why the reserves were being reversed -- it might be that it was legitimate and it wasn't manipulated, but it very often can be manipulated and there have been lots of problems over the last several years with companies using cookie jar reserves," said Joseph Carcello, a professor of accounting at the University of Tennessee.

KPMG LLP, which replaced Andersen in May to audit the company's books, has been asked to assist in the review of the 1999 and 2000 financial statements, WorldCom said.

In the report to the SEC, WorldCom said its vice president for internal audit, Cynthia Cooper, discovered in mid-May that a number of "questionable transfers" had been made into capital accounts. The transfers involved part of the costs for network services and facilities provided by third parties, it said.

WorldCom CFO Scott Sullivan, who was fired on June 25, repeatedly defended his actions as appropriate and said a writedown would be sufficient, rather than a restatement, in the second quarter of 2002, the report said.

(With additional reporting by Ben Klayman in Chicago, Sinead Carew and Deepa Babington in New York.)