NEW YORK (Reuters) - Google Inc. slashed the size of its closely watched initial public offering nearly in half to less than $2 billion on Wednesday, splashing cold water on what has been touted as the hottest Internet IPO in years.

But securities regulators are expected to declare Google's registration statement effective after 4 p.m. EDT (2000 GMT), sources familiar with the matter said, which would pave the way for the world's most popular Web search engine to price its shares and sell them to the public.

Google shares could make their market debut on the Nasdaq stock market (NDAQ.OB) as soon as Thursday, ending the wait for the year's most anticipated IPO.

The offering is now slated to bring in as much as $1.9 billion, sharply lower then expectations that it would raise $3.5 billion if the shares priced at the top of Google's original estimated range of $108 to $135 per share. On Wednesday, Google cut the range to between $85 and $95 a share.

The revision came as Google disclosed in an amended filing that the U.S. Securities and Exchange Commission has asked for "additional information" about the publication of a Playboy magazine article featuring an interview with Google's co-founders.

Google's unusual auction-based IPO has attracted skeptics since it was announced in April, and the IPO is bumping up against a jittery market. Roughly 60 percent of this month's IPOs have priced below their estimated range, according to Thomson Financial.

But market conditions are not purely to blame. Many investors said Google's initial price range was overly optimistic and were wary of investing in the stock.

In addition, Google has disclosed that its general counsel received a notice that the SEC staff intends to recommend the commission pursue civil penalties against him; the Playboy interview has drawn regulatory scrutiny; and the SEC has started an informal inquiry into Google's offer to buy back 23.2 million shares it may have issued illegally.

Google reiterated on Wednesday that it does not believe its involvement in the Playboy article violated securities rules.

"They better get their act together, otherwise they will face a lot of investor scrutiny above and beyond what they probably deserve," said Christopher Baggini, who manages three funds with total assets of about $900 million at Gartmore Global Investments. He said that even $85 to $95 per share was "not necessarily low enough" for the IPO price.

REVISED TERMS

Shareholders more than halved the number of shares they plan to sell in the IPO to 5.5 million from about 11.6 million. Google co-founders Larry Page and Sergey Brin and Chief Executive Officer Eric Schmidt cut by half the number of shares they will offer.

Google still plans to sell about 14.1 million shares.

The Mountain View, California-based company disclosed the changes on its Web site, http://www.ipo.google.com. Google spokeswoman Cindy McCaffrey confirmed the Web site contents but declined further comment.

The company said it asked the SEC to declare its registration effective on Wednesday at 4 p.m. EDT and said it expects to close the auction when the statement is declared effective.

The changes cut the potential maximum valuation of the company to $25.8 billion from $36.6 billion, based on securities filings.

"The last thing you want when markets are fragile is a high-profile IPO running into difficulty," said Michael Browne, a fund manager at Sofaer Global Fund in London. "Sentiment-wise, it's not good."

THE AUCTION

Google is using a modified version of a Dutch auction to sell its shares.

In a typical Dutch auction, the offering is launched at the highest price at which all of the shares can be sold. However Google could price the IPO lower to get a wider distribution of shares to retail investors. That in turn may crimp demand from institutions who fear that a larger-than-normal retail investor base could make the stock particularly volatile.

Also weighing on the IPO is the uncertainty Google faces in a competitive market where rivals Microsoft Corp. (MSFT.O) and Yahoo Inc. (YHOO.O) have the funds to invest in development.

Credit Suisse First Boston and Morgan Stanley are arranging the IPO. CSFB declined to comment, and Morgan Stanley could not immediately be reached for comment.