* Says Home Office to select alternative supplier
* Capita to sign interim extension beyond 31 March 2013
* Shares down 2 pct, second biggest FTSE100 faller
LONDON, Oct 3 (Reuters) - British outsourcing firm Capita said on Wednesday it had lost out on a new government contract to run criminal records checks after the Home Office pursued talks with a rival supplier.
The trade union representing staff under Capita's existing contract said the coalition government is likely to award the deal to Tata Consultancy Services, part of India's salt-to-steel conglomerate Tata Group. Analysts also expected TCS to get the nod.
Capita has run the UK's Criminal Records Bureau disclosure service for over 10 years under a deal worth around 400 million pounds ($650 million), and had hoped to secure a similar contract to support the replacement Disclosure and Barring Service (DBS).
"Capita is disappointed not to have been selected by the Home Office to support DBS," it said in a statement on Wednesday. "We will now work with the CRB, and its new partner, to enable the smooth transfer of the service."
Capita shares, which started the day 18 percent up on three months ago, were down 2 percent to 760 pence in heavy trade at 1325 GMT, the second biggest FTSE 100 faller.
The Home Office would not make any comment on the contract supplier, only confirming in a statement that the deal had yet to be awarded by the coalition government.
However, the UK's Public and Commercial Services Union, which represents Capita's CRB staff, said the Home Office had indicated in July its "intention to award" the DBS contract to IT firm TCS.
While there was no immediate response from TCS, analysts at Shore Capital said they believed the new supplier may be Tata, which already has operations based in Liverpool, from where the existing contract is primarily delivered.
Espirito Santo analyst David Brockton said the market had expected bad news for Capita after the contract award was delayed earlier this year.
"We remain cautious on Capita as we believe there will be greater competition for back office outsourced solutions, as supported by the fact that another supplier has been favoured to win the DBS contract."
The DBS is the merger of the Criminal Records Bureau, which helps employers make safer recruitment decisions, and the Independent Safeguarding Authority, which prevents unsuitable people from working with vulnerable groups, including children.
Capita said pending the finalisation of a full handover of the services to the new supplier the CRB would extend its contract with the firm beyond the current expiry date of March 31, 2013 - probably until June next year at the earliest.
In July Capita, whose contracts range from managing over 21 million life and pension policies to providing radios for Britain's emergency services, posted a 10 percent rise in first half profit and said work with central and local government was piling up.