UPDATE 1-S&P drops new MBIA muni insurer rating to "A"

(Adds reaction from MBIA)

CHICAGO, June 5 (Reuters) - Standard & Poor's Ratings Services on Friday downgraded the rating for National Public Finance Guaranty Corp, a unit of MBIA Inc (MBI.N), to A from AA-minus.

The rating agency also dropped MBIA Insurance Corp's rating to BBB from BBB-plus with a negative outlook.

"The downgrade of National reflects our view of both its uncertain business and capital-raising prospects," said S&P credit analyst David Veno in a statement. "The company's capital adequacy is marginally below our AA standard."

S&P said the outlook on National was developing.

MBIA announced earlier this year it was separating its municipal bond operations into a new unit -- an action that led several major banks to sue alleging MBIA acted illegally with the business spin off.

S&P said National's rating could rise if there is a favorable resolution of the litigation, "which in turn could facilitate capital-raising efforts and lead to more tangible separation of National from MBIA and MBIA Inc."

But it warned that ongoing lack of market acceptance and weak financial flexibility could push the rating into the "BBB" category.