By Steve Slater and Douwe Miedema
* Q3 underlying pretax profit drops 36 pct to $3 bn
* U.S. bad debts jump as homeowners stop repaying mortgages
* Investment bank profits slump on rates, credit slowdown
* UK regulation may cost $2.5 bn/yr, may be "too high" to stay
* Shares fall 6 percent
LONDON, Nov 9 (Reuters) - HSBC gave its starkest warning to date that new regulations might force it to leave Britain and warned that problems in Europe had hurt growth elsewhere and created a "very challenging" global economy.
Europe's biggest bank reported a 36 percent fall in third quarter profits as the euro zone debt crisis hit investment bank income and bad debts jumped almost $1 billion in the United States as homeowners stopped paying their mortgages.
Extra British regulations could cost $2.5 billion a year, which the bank said on Wednesday may be "too high" to stay, though it would delay its decision to move its headquarters back to Hong Kong or elsewhere until at least next year.
HSBC's shares fell more than 6 percent, as analysts said underlying profits of $3 billion in the three months to the end of September fell short of expectations and there was also disappointment on rising costs and U.S. bad debts.
"Asian growth is insufficient to fill the hole left by run-off of the Household disaster in the U.S., and (investment bank) GBM profitability has fallen sharply," said Ian Gordon, analyst at Evolution Securities. "The challenge of improving the group's cost efficiency is tortuous," he added.
HSBC Chief Executive Stuart Gulliver aims to cut annual costs by $3.5 billion and sharpen the bank's focus on Asia, quitting countries where the bank lacks scale in an attempt to revive profitability.
The bank was turning a corner on costs and making progress on the turnaround plan, but it would be a long haul and external headwinds were building, he said.
"The outlook for the global economy is very challenging as problems in developed markets begin to affect growth rates around the world," Gulliver said.
Losses on bad debts swelled to $3.9 billion in the third quarter, up $1 billion from the previous quarter, as U.S. impairments jumped by 64 percent to $2.4 billion, which the bank blamed on a moratorium on mortgage foreclosures.
"We're seeing the effects of moral hazard, where even seriously delinquent customers simply cannot be foreclosed on by banks operating in the United States," Finance Director Iain Mackay told journalists on a conference call.
Delinquencies on loans jumped in September.
"We believe we're seeing people taking payment holidays from their mortgages recognising that banks are unable to foreclose on them," Mackay said.
HSBC became one of the biggest providers of so-called sub-prime mortgages for customers with a weaker credit history in the United States after its purchase of Household Finance eight years ago. It has closed the business and is running down its $50 billion loan book.
U.S. regulators suspended foreclosures, although banks in some states have restarted foreclosure actions since.
HSBC fired a warning shot at British politicians who are considering imposing tougher regulations, saying the cost might prompt it to move its headquarters out of the country where it has been based for the last 18 years.
Gulliver said requiring banks to hold substantial debt that can absorb losses if it hits trouble could force HSBC to issue $55 billion of senior debt, at an annual cost of $2.1 billion. He said deposit-rich HSBC does not need this extra buffer.
It pays another $400 million on its overseas assets under a UK bank levy.
"You get to a $2.5 billion cost for being UK headquartered. This is a non-trivial decision, you don't move your head office on a regular basis," Gulliver said.
Mackay said of the $2.5 billion cost: "We would probably view that as too high."
Gulliver said the decision would not take place at this month's board meeting, and would likely be taken in the next year to 18 months. It would only consider moving the holding company abroad, and the retail bank would "always" be based in the UK.
HSBC has so far said it will sell or retreat from 14 countries. They include the sale of its U.S. credit card business and branches in New York state, retail businesses in Russia, Poland and Chile, and its Canadian brokerage business. It is exiting Poland and Georgia.
It has also put its $1 billion general insurance business on the block.
HSBC's corporate clients provided a rare bright spot, but GBM's profit almost halved from the previous quarter to $1 billion. Operating income for credit and rates was a negative $460 million, offsetting strong profits in foreign exchange and equities.
Its costs so far this year were 54.6 percent of revenue, up from 54 percent last year, while it had reduced headcount by 5,000 since the first quarter.
The bank cut its holdings of the sovereign debt of Greece, Ireland, Italy, Portugal and Spain to $5.5 billion by the end of September, from $8.2 billion three months earlier.
By 1245 GMT, HSBC's London-listed shares were down 6.1 percent weaker at 505 pence. The stock has fallen 22 percent this year -- still not as bad as a 34 percent drop in the wider DJ index of European banks .