May 26 (Bloomberg) -- UBS AG, the European bank hardest hit by the U.S. subprime contagion, fell the most in more than two months in Swiss trading after saying it may face more losses from mortgage securities.

UBS declined 1.74 Swiss francs, or 5.8 percent, to 28.20 francs in Zurich, the biggest slump among the 59 companies on the Bloomberg Europe Banks and Financial Services Index. UBS has dropped 43 percent this year, cutting its market value to 61.4 billion francs ($59.9 billion).

UBS, in the prospectus for its 16 billion-franc rights offer, said the bank's losses on non-U.S. residential and commercial real-estate securities ``could increase in the future.'' UBS is also evaluating whether to limit or discontinue one or more U.S. reference-linked note programs, which ``could result in a charge to income,'' the bank said in the document, released after markets closed on May 23.

``UBS will have to fight against negative news flow for at least several more quarters,'' said Rolf Biland, who helps manage about $3.1 billion, including UBS shares, as chief investment officer at VZ Vermoegenszentrum in Zurich. ``The U.K. housing market is almost as overheated as in the U.S., and could lead to losses for banks.''

U.K. home values fell for an eighth month in May and will probably drop further, Hometrack Ltd., a London-based research company, said today. The average cost of residential property in England and Wales fell 1.9 percent this month from a year earlier, the biggest decline since November 2005.

Start of Rights Trading

UBS is seeking to replenish capital after about $38 billion in writedowns related to the U.S. subprime crisis. The bank still has more than $45 billion in U.S. mortgage-related assets, $8.6 billion in leveraged finance commitments and $10.4 billion in U.S. student loans on its books.

The company hasn't said how much it holds in non-U.S. mortgage securities. UBS's net exposure to reference-linked notes was $8.9 billion at the end of March. The bank had created 10 such programs, which sold bonds referenced to a pool of asset- backed securities held by the bank, with a face value of $16.9 billion.

UBS shareholders can start subscribing tomorrow for shares in the rights offer, which allows them to purchase seven new shares for every 20 held at 21 francs each. The bank plans to sell 760.3 million new shares, which are due to start trading on June 13, to raise net proceeds of about 15.5 billion francs.

Investors can also trade their rights on SWX and the New York Stock Exchange between tomorrow and June 9. The value of rights was about 2.50 francs, said analysts including JPMorgan Chase & Co.'s Kian Abouhossein, when the price for the new shares was announced on May 22.

UBS already raised 13 billion francs in March from the Government of Singapore Investment Corp. and an unidentified Middle Eastern investor.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net;

Last Updated: May 26, 2008 12:10 EDT