By Erin Zureick and Alexandria Sage

CHICAGO/SAN FRANCISCO (Reuters) - Overstock.com Inc (OSTK.O: Quote, Profile, Research) shares tumbled about 40 percent on Friday following a downgrade by one brokerage, as higher spending and fears of slowing growth spooked investors despite a narrower loss.

The sell-off abruptly ended a 78 percent rise since January in shares of the online retailer that sells excess goods such as furniture, clothing and accessories.

Stifel Nicolaus cut its rating to "sell" from "hold," with analyst Scott Devitt noting that even if shares traded at $20 -- they closed Thursday at $27.70 -- they would still be valued above Overstock's peer group.

Overstock's net loss was $6.5 million, or 28 cents per share, for the quarter ended June 30 compared with a net loss of $13.8 million, or 58 cents per share, a year earlier.

Three analysts polled by Reuters Estimates had forecast on average a loss of 28 cents per share.

Total revenue increased 27 percent, to $188.8 million from $149 million, helped by growth in the company's fulfillment partner business. That sector acts as a liaison between companies looking to get rid of surplus products, with the goods shipped by third-party partners.

Devitt noted that Overstock confirmed during its call that it faced easier growth comparisons this quarter over the prior year, but that they would become more difficult in the latter half of the year.

"So the growth rate will be closer to 17 percent rather than 27 percent," Devitt told Reuters.