By Ransdell Pierson

NEW YORK (Reuters) - Confidence in Merck & Co's (MRK.N: Quote, Profile, Research) earnings prospects withered on Tuesday, along with its stock price, after U.S. regulators surprisingly rejected the drugmaker's treatment to raise levels of "good" HDL cholesterol.

Shares of Merck, already battered by this year's failed trial of its blockbuster Vytorin cholesterol drug, were swept as much as 10.8 percent lower in Tuesday trading. They are down 36 percent for the year.

Merck for years has touted the drug, which it had planned to call Cordaptive, as one of its most important experimental medicines and a major new weapon to prevent heart attacks and stroke. But the Food and Drug Administration late on Monday slapped the product down with a so-called not-approvable letter.

"The issuance of a not-approvable letter suggests a serious deficiency in the new drug application" by Merck for the medicine, Leerink Swann analyst Seamus Fernandez said in a research note, calling the rejection surprising and disappointing.

Merck did not explain why the FDA spurned Cordaptive, other than to say the agency wants additional information on the drug. It is an extended release form of niacin that is combined with a chemical meant to reduce flushing -- uncomfortable redness and burning of the face and neck that is a side effect of niacin.

Sanford Bernstein analyst Tim Anderson speculated the FDA rejection was due to the same type of blood-clot risk that had sparked the withdrawal of Merck's arthritis drug Vioxx, although no such risk has been reported from the medicine's clinical trial data.

"A rejection by the FDA would either seem to mean that in the full dataset there was a signal that just was not presented, or that the FDA was worried instead about a theoretical safety issue that would only be seen with more widespread use of the product," Anderson said in a research note.

Anderson lowered by 7 percent his 2012 profit forecast, to $3.64 per share.