By Ananya Mariam Rajesh

(Reuters) -Capri shares slumped nearly 46% on Friday after a U.S. judge blocked its pending $8.5 billion merger with Coach parent Tapestry , hurting the Michael Kors owner's chances of navigating challenges at the luxury brand.

Tapestry agreed to buy Capri last year to create a U.S. luxury giant that could compete better with larger European rivals by bringing brands Coach, Kate Spade, Stuart Weitzman, Versace, Jimmy Choo and Michael Kors under one roof.

Capri stock was trading at $22.46, well below Tapestry's offer price of $57 per share, and was set to wipe out $2.2 billion from its market cap.

Execution issues across Capri's wide portfolio of brands have led to market share losses at a time when the broader luxury market faces a slowdown in demand, with consumers earmarking their dollars for essential purchases.

The Federal Trade Commission (FTC) sued to block the deal in April, saying it would eliminate "direct head-to-head competition" between the top two U.S. handbag makers.

Should the deal fall through, "Capri could potentially seek another suitor", said Dana Telsey of Telsey Advisory Group.

"The attractiveness of the acquisition began to moderate", pressured by Capri's weak results and an extension of the deal timeline following the FTC challenge, Dana said.

Tapestry's shares rose nearly 15%. Analysts said the deal would have posed an added risk to the Coach parent even though it was well-positioned to revive Capri.

During an eight-day trial in September, the FTC argued the deal would create a massive company with the power to unfairly raise prices.

U.S. District Judge Jennifer Rochon on Thursday rejected the companies' defense, including their argument that handbags are non-essential items and consumers can control the prices by not buying them if they become too expensive.

"Investors were clearly surprised by the outcome as it seemed like the focus of the deal was to compete at global luxury level and not just the U.S. market," said Brian Jacobsen, chief economist at Annex Wealth Management.

Tapestry said it believes the ruling was incorrect and plans to appeal.

"I think the (defense) parties might try to get an expedited appeal to the second circuit. I think they do have a chance on their timeline to do that," said Mike Keeley, partner and chair of the antitrust group at Axinn, Veltrop & Harkrider LLP.

(Reporting by Ananya Mariam Rajesh in Bengaluru and Siddharth Cavale in New York; Editing by Devika Syamnath)