* Retailers cut orders amid fears of poor Christmas
* Double-digit drop in sales volumes in recent weeks
* Shares plunge over 25 percent to 3-1/2 year lows
* Exposure to Woolworths partly insured
(Adds FD, analyst comment, detail, background, shares)
By Mark Potter
LONDON, Nov 24 (Reuters) - Toy maker Character Group issued a profit warning on Monday, sending its shares plunging over a quarter in value in the latest sign of distress on Britain's shopping streets.
The group, which makes toys under brands such as Doctor Who, High School Musical and Scooby Doo, said retailers had cut back orders ahead of the key Christmas trading period due to a plunge in consumer confidence after the global financial crisis.
"They're very, very reluctant to take in inventory," Finance Director Kiran Shah told Reuters, adding Character had seen a "double digit" percentage drop in sales volumes in recent weeks.
Character supplies Britain's four top toy retailers, Home Retail, Tesco, Woolworths and Toys R Us, and Shah denied its problems were linked to any one of them.
Woolworths is in talks to sell its store chain to restructuring specialist Hilco for a nominal sum.
"It's across the board," Shah said in a telephone interview, adding that part of Character's exposure to Woolworths in its debtor book was insured.
Britain's retailers are slashing prices amid fears that shoppers will cut spending further as unemployment rises and the recession deepens.
The UK government is expected to announce billions of pounds of tax cuts later on Monday in a bid to stop a recession from turning into a slump.
Character said profit before tax for the year ended Aug. 31, 2008, was likely to be 5 million pounds ($7.5 million), in line with analysts' expectations.
But results for the current financial year would be hit by lower than expected sales, as well as cost inflation from China, where most of Character's toys are made, and a rising dollar.
"The main problem really has been the pressure on the margin where, on the one hand, retailers have wanted much, much better pricing, and on the other side we've been hit by cost increases and movements in exchange rates," Shah said.
Paul Bates at house broker Charles Stanley said he was provisionally cutting his profit forecast for the year ending August 2009 to break-even from 6.5 million pounds.
At 0900 GMT, Character shares were down 25.9 percent at 30 pence, after touching a 3-1/2 year low of 28 pence, valuing the business at about 12.5 million pounds.
Shah said Character, which employs around 160 people, was undertaking a "top to bottom" review that was likely to involve some downsizing of the business, which might include job cuts.
Character's Cup Cake Maker, which was tipped as a top seller for Christmas this year, had sold out, Shah said. (Editing by Victoria Bryan)