* Legg Mason shares down 13 percent in midday trading
* Cuts quarterly dividend to 3 cents/shr from 24 cents/shr
* Analyst attributes fall to dividend cut
* CEO defends action, asset sales
* Revenue fall 42 pct to $617.2 mln
* Net loss widens to $325.1 mln, $2.29 per share (Adds analyst and CEO comment, details on asset sales)
By Ross Kerber
BOSTON, May 5 (Reuters) - Legg Mason Inc (LM.N) reported a widened quarterly loss on Tuesday and slashed its dividend after paring toxic assets from its money market funds, sending its shares tumbling as much as 22 percent.
The company's stock was down 13.5 percent around 1:30 pm, recovering slightly from earlier lows. It reported a net loss of $325.1 million, or $2.29 per share, for its fiscal fourth quarter to March 31, compared with a loss of $255.5 million, or $1.81 per share, in the year-earlier quarter.
The loss mainly reflected the cost of cleaning up money market funds with holdings tied to structured investment vehicles, entities whose assets included risky mortgage-linked securities.
Like Legg, other companies including Bank of America (BAC.N) and Putnam Investments (GWO.TO) were forced to prop up or rescue supposedly safe money market funds after they were left holding too many problem assets starting in late 2007.
Although Legg's results were close to expectations, the sharp dividend cut appeared to be the main driver for the share declines, said Alan Rambaldini, asset management analyst at Chicago research firm Morningstar Inc.
"The dividend cut is weighing on the share price. I didn't see that coming at all. It will not be for another year that they would be able to raise it again," he said.
Speaking on a conference call with analysts, Legg Chief Executive Mark Fetting said that "our shareholders deserve better results and we are determined to pick up the pace of our own recovery."
But in an interview, he added that given the $10 billion in troubled assets Legg held in its money market funds in the fall of 2007, cleaning up the assets amounts to "a good outcome" for investors both in the funds and the investment company itself.
He said the dividend cut was so deep, to 3 cents a share from 24 cents a share, because "we wanted to make sure we got it right so we can build it back from here" rather than making further cuts.
Analysts surveyed by Reuters Estimates were expecting the Baltimore company to lose $2.33 per share. Revenue fell 42 percent to $617.2 million, against the average analysts' forecast of $611.5 million.
Legg, one of the largest publicly traded U.S. money managers and home to once-vaunted stock picker Bill Miller, said it has no more of the problem assets in its money funds today.
Most of the toxic assets were held by money market funds operated by Legg's Western Asset Management Co unit in Pasadena, California.
Fetting said selling those assets generated about $8 billion. Most recently, on March 5 Legg said it sold $1.8 billion worth of these assets at 25 cents on the dollar. It said on Tuesday the sale resulted in losses of $367.4 million after taxes and operating expenses, or $2.59 per share.
Net outflows of $43.5 billion in the quarter contributed to a decline in assets under management to $632.4 billion as of March 31, down 9 percent from Dec. 31, Legg said.
It had about $640 billion under management at the end of April, executives said on the conference call.
Like other asset managers, Legg had seen sharp outflows as markets declined and on concerns over the money market funds.
However, the outflows were lower than the total outflows of $77 billion Legg reported in its December quarter.
Jefferies & Co. analyst Dan Fannon said Monday he expected outflows of around $40 billion for the fourth fiscal quarter, a rough consensus, because of improved stock markets and seasonal habits of investors. The flows number the company reports will likely have a impact on the stock price, he added.
Its shares fell to $19.47 from their close of $22.53 on the New York Stock Exchange on Monday and have lost around 70 percent of their value from a year ago when they closed at $64.26 on May 5, 2008. However, they have recovered from a low of $10.37 on March 9 after SIV sales. (Additional reporting by Christopher Kaufman and Svea Herbst-Bayliss. Editing by Jason Szep)