The transformation would erase much of RIM's earnings power, Morgan Stanley analyst Ehud Gelblum said in a note to investors in which he downgraded RIM to "underweight" from "equal weight."

"We believe the fundamental story at RIM is essentially broken," Gelblum said. "The most likely way to unlock value from the company is either through a strategic option or selling off the operations," he added, but said neither is likely in the short term.

RIM has said it would report an operating loss later this week as analysts grow increasingly concerned about the company's ability to conserve cash during a painful transition.

Gelblum said RIM would have to spend an increasing share of the earnings generated by its valuable subscription-based services to support its loss-making devices unit. He said he had little faith that the next-generation BlackBerry 10 devices will succeed in reversing RIM's decline when they finally launch later this year.

His scaled-down version of RIM would have just 2,000 employees, down from 16,500 currently, ship between 5 million and 10 million devices a year and collect sharply lower subscription fees. RIM shipped 11.1 million phones last quarter.

He estimated it would cost the Canadian company $2 billion to cut that many jobs.

The stock closed at $9.11 on the Nasdaq. The 7.6 percent fall is its steepest since late May, when it said it expected to report an operating loss for its fiscal first quarter and said it had hired investment bankers as part of a strategic review.

"In a weak market, people tend to sell their weakest stock first," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier. He said RIM's drop on Monday likely reflected a combination of the analyst report, nervousness ahead of RIM's financial results on Thursday, and a broader decline in equity markets.

(Reporting by Alastair Sharp; Editing by Frank McGurty)

• A Permanent Economic Emergency