May 14 (Bloomberg) -- Shares of Massey Energy Co., the fourth-largest U.S. coal producer, had their biggest drop since July after an analyst said a federal water-pollution lawsuit may lead to $2 billion in fines.

The shares slid $2.73, or 9 percent, to $27.60 in New York Stock Exchange composite trading. The decline was the biggest for Richmond, Virginia-based Massey since July 28. Before today, the stock had jumped 31 percent this year.

The U.S. filed a civil lawsuit against Massey accusing the company of 4,633 violations of the Clean Water Act over the past six years, Credit Suisse analyst David Gagliano said today in a note to clients. Based on 69,000 days of non-compliance, Massey could face $2 billion in fines, he said.

``Considering the theoretical scope and magnitude of this most recent federal lawsuit, in our view this cannot be good from a Massey Energy shareholders perspective,'' Gagliano said in his note.

The company has tried to comply with all federal and state regulations regarding water pollution, Chief Executive Officer Don Blankenship said in a statement. Massey said it doesn't expect the suit to have a material impact on ``ongoing prospects for the company.''

``For the permits in question, the company believes it achieved a compliance rate of 99 percent or better,'' Blankenship said.

`Company Seems Confident'

Massey's shares fell as much as 14 percent before the company issued its statement on the lawsuit.

``The company seems confident there won't be a material impact, and that's all we've got to go on right now,'' said Ann Kohler, an analyst at Caris & Co. in New York who has a ``buy'' rating on Massey shares and doesn't own any. A large judgment against Massey would likely be appealed, she said.

The suit was filed May 10 by the U.S. Environmental Protection Agency in U.S. District Court in Charleston, West Virginia, alleging illegal discharges from mines in West Virginia and Kentucky. Massey and more than a dozen subsidiaries were named as defendants.

The mining company in March was fined $1.5 million for safety violations that federal regulators said contributed to the deaths of two West Virginia coal miners.

Peabody Energy Corp., Arch Coal Inc. and Consol Energy Inc. are the largest U.S. coal producers.

The case is United States of America v. Massey Energy Co., et al, 2:07-cv-00299.

To contact the reporter on this story: Christopher Martin in New York at cmartin11@bloomberg.net.

Last Updated: May 14, 2007 16:30 EDT