NEW YORK (Reuters) - Elan Corp. yesterday said US regulators were investigating whether the Irish drugmaker unfairly blocked generic competition for its muscle relaxant Skelaxin, endangering the proposed sale of US rights to the drug to King Pharmaceuticals Inc.

Shares of Elan fell as much as 35 percent in New York Stock Exchange trading as investors worried that the company's efforts to pay off its massive debt load could be hampered if the $850 million deal with King collapsed. Shares of King fell more than seven percent.

The Federal Trade Commission is already investigating whether Elan impeded cheaper generic competition for its painkiller Naprelan.

A number of drugmakers have been targeted by US regulators for using multiple patents to extend their monopolies over medicines, thereby preventing cheaper generic versions from reaching the market. Consumer groups allege the strategy is an abuse of federal law.

A spokesman for King, citing the probe, said it was questioning its pending deal with Elan to buy US rights to Skelaxin and the sleep aid Sonata.

Elan's main chemical patent over Skelaxin has already expired, but the company has a secondary patent that extends to 2021. The company listed the patent in the Food and Drug Administration's "Orange Book" of additional patents over existing drugs - a minefield for generic drugmakers seeking to market copycat versions of lucrative medicines.

Skelaxin generated US sales of about $155 million last year.

Elan last month said the FTC had subpoenaed documents in 2002 in the Naprelan case. Elan Chairman Garo Armen yesterday said he believed the FTC had also issued a subpoena in the Skelaxin investigation.

Elan is struggling to regain credibility after making a slew of unprofitable biotechnology investments that saddled the company with heavy debts. To pay off its debts, it is selling off its stakes in medicines that it already owns and that it intended to develop with biotech partners.

"Our recovery plan didn't depend on any single deal going through or falling through," Armen said.

He said Elan has about $2.8 billion in debt obligations to be paid off by 2008.

One of the most important products in Elan's pipeline of future drugs is Antegren, an experimental treatment for multiple sclerosis that some analysts believe could generate annual sales of more than $1 billion if it is approved.

King January 30 agreed to acquire the US rights to Skelaxin and Sonata from Elan, as well as the contracts of some Elan sales representatives. The transaction is still pending.

The deal was consistent with King's strategy of acquiring medicines with modest sales and trying to maximize their potential with smart marketing.

Armen said it would be premature to speculate about the possibility of selling only Sonata to King while leaving Skelaxin out of the deal.

Elan shares fell $1.22, or 32.6 percent, to close at $2.52 after hitting a session low of $2.43. King's stock slumped 88 cents, or 7.3 percent, to finish at $11.11 after reaching $11.05, its lowest point in over three years.

Analysts have expressed skepticism about whether Skelaxin and Sonata can become big money-makers for King. They have also questioned King's $108 million purchase of the US rights to the female hormone replacement therapy Ortho-Prefest from Johnson & Johnson in April 2002.

King Tuesday disclosed that the Securities and Exchange Commission was investigating its pricing and rebate practices on certain drugs, including its top-selling medicine, Altace for hypertension.

King's stock has declined steadily since the Ortho-Prefest acquisition, falling to about $16 at the beginning of this week from more than $31 at the time of the J&J deal.

After the company disclosed the SEC investigation Tuesday, the stock slumped 23 percent to $12.17 and traded at its lowest levels in more than three years.

King has also been plagued over the past year by concerns that the thyroid treatment Levoxyl, its second-biggest seller, would soon face generic competition.