* Paulson & Co sells its entire stake in Sino-Forest
* Sino-Forest defends itself against allegations
* Dundee analyst suspends coverage on Sino-Forest
* Shares close down 14 pct on the Toronto Stock Exchange (Adds analyst comment, share price move, background)
By Euan Rocha
TORONTO, June 20 (Reuters) - Billionaire hedge fund manager John Paulson, the largest shareholder in Sino-Forest TRE.TO, has sold his entire stake in the Chinese forestry company in the latest in a string of setbacks triggered by a damning short-seller's report.
The Toronto-listed company's shares have collapsed in the wake of accusations by research firm Muddy Waters that it fraudulently exaggerated the size of its forestry assets.
Paulson, who himself made a fortune on a short bet against subprime mortgages, has been burned by the scandal that has engulfed Sino-Forest. The company has shed over C$4 billion in market capitalization since the beginning of June.
Paulson's Advantage Plus fund, one of the $38 billion firm's largest, fell 13 percent in the first two weeks of June, partly due to the plunge in Sino's share price.[ID:nN15303142]
"Due to the uncertainty over Sino-Forest's public disclosures and financial statements, we have sold our stock and await the results of the independent committee's investigation," a spokesman for Paulson & Co said in an e-mail on Monday.
While it wasn't immediately clear how much Paulson lost on the sale, his 14.1 percent stake in Sino would have been worth C$897.4 million as of the end of March. The same stake would be worth just C$94.8 million at Monday's closing price.
Earlier, one of Sino's most vocal supporters, Dundee Capital Markets analyst Richard Kelertas, suspended his coverage of the company, pending the outcome of the company's internal review.
Shares of Sino, which counts Glencore (GLEN.L) Chairman Simon Murray as one of its directors, fell even further on Monday, after Canada's Globe and Mail newspaper in a report said it uncovered "glaring inconsistencies" that raised more doubts about Sino-Forest's assets.
The company continues to deny the allegations leveled against it and said the newspaper report on its timber assets was an "incorrect portrayal" of its business that failed to account for the complexity of operating in China.
Sino-Forest, which buys and sells trees in China, said it stood by earlier statements that there are no discrepancies in its holdings. The company said Saturday's Globe report was published "without all of the facts."
The Globe said it stood by its story. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Q&A about allegations against Sino: [ID:nN15276780]
Chart on Sino AI structure: link.reuters.com/qam22s
Analysis on U.S.-listed Chinese companies: [ID:nN10232390]
Special report on Chinese stock scams: [ID:nN06271838] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
"The company would like to remind investors that most domestic and multinational companies with significant China exposure, a country with a rapidly evolving business environment, have structures and operations that are complex and significantly different from the North American environment and that can be complex to explain," Sino-Forest, which has set up a committee to review the charges, said in a release.
"The company ... stands by its public disclosure and, as far as possible, asks that investors trust that process, and allow it to be conducted fully and definitively, not over-judging single articles or publications that are not produced by persons necessarily familiar with the forestry business or business practices in China, that might not be fully sourced or accurate."
Dundee's Kelertas, who had earlier slammed the Muddy Waters report as a "pile of crap," on Monday suspended his coverage of the Chinese company.
"Until such time as the company has made public the findings of the board appointed independent committee ... we are not in a position to comment on or otherwise speculate on matters as they relate to the business practice or valuation of Sino-Forest," he said in a note to clients.
Dundee, a member of the underwriting syndicate for Sino's equity offerings, has itself been named as a defendant in legal action against Sino-Forest.
RBC Capital Markets analyst Paul Quinn said in a note to clients he will maintain his "outperform" rating on Sino-Forest shares, but he cut his price target to $14 from $27.
"The allegations against Sino-Forest are material and expected to weigh on the company's share price for some time. We continue to expect that it will be some time before Sino shares trade at their pre-Muddy Waters levels," he said.
Sino-Forest's share price has plunged more than 85 percent since short-seller Muddy Waters questioned its business model and labeled it a fraud early this month. Its shares fell a further 14 percent on Monday to C$2.73. (Reporting by Euan Rocha; editing by Frank McGurty)