Carbon credits for December 2006 delivery fell as low as 14 euros in early Thursday trading on the European Climate Exchange -- down more than 50 percent from a high of 31 euros last week.

Prices had recovered to some 17 euros at 1000 GMT, in a highly volatile market.

The EU scheme sets a cap on total emissions by smokestack industries of heat-trapping carbon dioxide (CO2) and requires companies to have a carbon credit for every tonne of emissions.

If emissions are below the cap, companies can sell their surplus carbon credits, dampening demand, and 2005 emissions published by states including Spain and France this week has taken the floor from under the market.

"From a market perspective it's terrible news," said James Emanuel, Head of Carbon Trading at brokers CO2e.com.

"If there's a (net carbon credit) surplus there's no incentive to reduce emissions and the (carbon) price collapses. It won't go to 0, it would effectively go down to the administrative cost of the scheme... it could be 1 euro, who knows?"

Carbon credits impact power prices by adding to the cost of power generation, and the carbon slide hit shares of utilities, which are also Europe's biggest polluters, and therefore the most exposed to the European carbon trading scheme.

"It's because of falling CO2 prices. They have also caused power prices to decline," said Herbert Wertz, fund manager at Generali Asset Management.

British Energy was down 1.8 percent, International Power 1.2 percent, RWE 2 percent, EON 2.1 percent and EDF 3.1 percent.

Morgan Stanley said on Thursday the utility stocks expected to come under most pressure from the carbon price collapse are nuclear power firms British Energy and Electricite de France, which have no exposure to carbon but high exposure to falling power prices.

Czech power giant CEZ, which has a surplus of CO2 credits and will see this asset drop in value, also stands to lose from the carbon sell-off.