* Advertising more than 5-star rating "misleading" public -NHTSA
* New policy comes three months after Tesla touts 5.4-star rating
* Tesla now facing bad publicity, stock drop after three car fires
By Deepa Seetharaman
DETROIT, Nov 20 (Reuters) - U.S. regulators on Wednesday blocked automakers from promoting vehicle safety ratings of more than 5 stars, three months after Tesla Motors Inc touted an outsized score on its Model S electric car in a press release.
The announcement adds to simmering tensions between the National Highway Traffic Safety Administration and Tesla, now grappling with bad publicity and a federal probe after a series of car fires raised questions about the safety of the Model S.
Tesla said in late August that the Model S had achieved a score of 5.4 stars, a figure based on Tesla's independent analysis of NHTSA data.
Still, the news release prompted NHTSA, which issues the star ratings, to update its marketing guidelines. NHTSA now explicitly bars companies from promoting safety scores higher than 5 stars. The updated guidelines also state that the safety scores are always whole numbers.
"Tesla's claim was an example of the potential confusion and inaccuracy that could be caused by incorrect use of the 5-Star ratings information in advertising and marketing statements," NHTSA said in a statement.
Tesla declined to comment. The 5-star safety rating system has been used by NHTSA since model-year 1994 vehicles and the agency does not issue scores above that threshold.
"Advertisers who claim more than 5 stars are misleading the public," NHTSA said, adding that violations could trigger action by federal or state authorities.
NTHSA launched a probe this week into the Model S following three car fires that raised questions about the safety of the car's design.
Tesla Chief Executive Elon Musk said in a blog post Monday that the automaker requested the recall, but that statement was flatly denied by NHTSA administrator David Strickland on Tuesday.
The first fire was reported in early October and the bad publicity has lopped off more than 37 percent of Tesla's market value since Oct. 1. Tesla shares fell 3.9 percent to close at $121.11 on the Nasdaq on Wednesday.
NHTSA's investigation into the Model S could take up to six months and cost Tesla about $13 million, Barclays Capital analyst Brian Johnson said in a research note Wednesday.
"The monetary cost of a recall is likely manageable," Johnson wrote. "The real issue is to what extent the publicity over the fire is likely to crimp Tesla Model S sales growth." He also cut his price target on the stock to $120 from $141.
In the past, highly publicized safety probes have led to a sales drop between 10 and 20 percent, Johnson said.
He noted Toyota Motor Corp's sticky-pedal issue in 2010 and unintended acceleration on the Audi 5000 in the 1980s. Audi is Volkswagen AG's luxury brand.
"Even though both vehicles were later largely exonerated, each of these cases led to significant demand destruction," Johnson said. (Editing by Matthew Lewis)