Updated from 12:30 p.m. EDT

Beazer Homes ( BZH) shares plunged Wednesday amid market buzz that the homebuilder would be filing for bankruptcy -- a rumor the company categorized as "scurrilous and unfounded."

The stock had tumbled as much as 42% midmorning but recovered ground and recently was down $2.73, or 19.5%, to $11.25.

Several market sources say they heard the rumor of a crisis at Beazer, but they had no information to verify it.

"We have become aware of rumors circulating in the market about Beazer Homes' liquidity and a prospective bankruptcy filing," Beazer said in a statement. "We do not know where these scurrilous and unfounded rumors started. For an accurate representation of the company's financial position, including the company's liquidity and near-term prospects, we encourage investors to refer to the company's recently released third quarter earnings release and the script of our conference call with analysts and investors."

Like most homebuilders, Beazer has recorded steep losses and declining home orders amid the widespread housing downturn. Last week, the company said reported a fiscal third-quarter loss of $123 million, or $3.20 a share, compared with a profit of $102.6 million, or $2.60 a share, a year earlier.

"I don't see how there could be a liquidity crisis there," says Fitch Ratings credit analyst Robert Curran. "Unless there was something out of the blue, but what out of the blue would prompt a bankruptcy filing?"

Curran notes that if there were an issue, Beazer's management would have been required to disclose it on its earnings call last week.

Fitch rates Beazer's debt a BB+, with a negative outlook. Hovnanian ( HOV) carries the same rating. In comparison, Centex ( CTX) and Lennar ( LEN) hold the higher BBB+ rating.

Builders with lower debt ratings than Beazer, according to Fitch, include M/I Homes ( MHO) (rating: BB, negative outlook) and TOUSA ( TOA) (rating: B-, negative watch).

Beazer homebuilder is under formal investigation from the Securities and Exchange Commission about alleged violations of federal securities law.

The company is the subject of various lawsuits related to its mortgage-origination business. The Charlotte Observer reported in March that Beazer was being investigated by federal authorities for loan practices related to a North Carolina development.

Beazer has launched its own investigation into the matter, and in June it fired its accounting chief for attempting to destroy documents related to the probe.

Shares of other homebuilders were also sliding Wednesday. Hovnanian was down 10% to $11.88, Toll Brothers ( TOL) was down 2.1% to $21.47, and Lennar slid 2.6% to $29.72.

Smaller builders, who have been more subject to concerns about liquidity problems, were hit particularly hard. WCI ( WCI) was down 13% to $7.64, while Comstock ( CHCI) dropped 14% to $1.54. Meritage Homes ( MTH) fell 8.7% to $17.81, and Standard Pacific ( SPF) fell 8.4% to $13.56.

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