NEW YORK (Reuters) - TXU Corp. slashed its dividend Monday and distanced itself from a struggling European division that now faces sale or insolvency in a move to restore investor confidence in its own stock.

Shares of TXU (TXU: Research, Estimates) tumbled $7.31 to $11.44 on heavy volume at mid-session, a drop of nearly 40 percent that made it one of the biggest losers on the New York Stock Exchange.

The Dallas-based power firm has faced slipping earnings, a downward spiraling share price and credit downgrades this year, and blames its mainly British business, TXU Europe, for its troubles.

Investor wariness about energy trading and complex debt structures since the collapse of Enron last year also have played a role.

TXU Corp.'s move effectively cuts TXU Europe bondholders adrift from the parent company through renegotiation of the terms of a $500 million bank loan. The company said its banks had agreed to remove "cross-default" terms under which credit default by TXU Europe automatically would have put parent borrowings in default as well.

The parent's new position also backs away from tentative plans unveiled last week to inject $700 million of new funds into the European business.

TXU said it will slash its quarterly dividend to 12.5 cents per common share, an 80 percent reduction from the previous 60 cents a share.

"Today's actions are the direct result of rating agencies' concerns as to the company's liquidity and credit situation," Chairman and CEO Erle Nye said. "Today's financial markets and concerns of the rating agencies have forced us to take this dramatic action."

The company also said it is negotiating final terms on an additional credit facility of up to $1 billion at its Oncor U.S. electricity network division to meet debt requirements. It added its capital expenditure for development throughout all regions will be reduced significantly.

For its part, TXU Europe said it was still honoring its power trading contracts in Britain. But the parent company could not immediately be reached for further comment on its gas trading business in Britain or its power trading business in continental Europe.