(Reuters) - Eastman Kodak is preparing a Chapter 11 bankruptcy protection filing in case it is unable to sell its digital patents to raise capital, The Wall Street Journal reported on Wednesday.

The once-iconic photographic film pioneer is in talks with potential lenders to secure about $1 billion in debtor-in possession financing to sustain Kodak through bankruptcy proceedings, the Journal reported, citing unidentified sources.

The Chapter 11 filing could come as soon as this month or early February, the newspaper said.

Kodak shares fell about 28 percent to 47 cents on the New York Stock Exchange following the online report, which dampened investors' hopes that the company could arrange a quick sale of its patents or a financing lifeline to keep it afloat.

A spokesman for Kodak declined to comment, saying its policy is not to comment on market rumors or speculation.

Kodak warned in November that it might not survive 2012 if it was unable to secure $500 million in new debt or sell its patents. The company's cash had been shrinking as sales of its consumer products have failed to keep up with its heavy cost base, which includes employees and offices around the globe.

In a two-day meeting in mid-December of the company's board, management and advisers, executives were briefed on how to fund Kodak during bankruptcy proceedings if efforts to sell its patents fall short, a person familiar with the matter told the Wall Street Journal. Kodak needed to sell the patents or borrow more money to stave off bankruptcy, the company told directors.

As part of its efforts to raise cash, Kodak has been looking since last July for a buyer for its 1,100 digital patents, with the help of investment bank Lazard Ltd.

The Journal said Kodak is still trying to sell the patents, which could help it stave off a bankruptcy filing. If Kodak does seek Chapter 11 protection, it could try to sell its patents through a bankruptcy auction supervised by a court

Kodak invented the digital camera in 1975 when one of its engineers developed a prototype that was as big as a toaster and captured black and white images. But it failed to capitalize on that innovation, and it was only when Kodak's film business began to decline a decade ago that it tried to catch up with rivals by launching a mass-market line of digital cameras.

The company has been beset by bankruptcy speculation since it drew down a credit line last September. It also hired restructuring firm FTI and confirmed that a law firm known for dealing with bankruptcy was doing work for it.

Last week, Kodak announced the resignation of three directors, including two representatives of private equity firm KKR & Co and a professor from the University of California, leading some industry experts to speculate that a Chapter 11 filing was imminent.

On Tuesday, Kodak said its stock may be removed from the New York Stock Exchange if the company cannot boost its share price over the next six months.

Kodak, whose cash fell to $862 million at the end of September from $1.4 billion a year earlier, is scheduled to report fourth-quarter results on January 26.

The company would need to seek debtor-in-possession financing in any bankruptcy filing to continue operating while it ran an auction for the patents. Kodak is in discussions with large banks including JPMorgan Chase & Co, Citigroup Inc, and Wells Fargo & Co for those funds, people familiar with the matter told the Wall Street Journal.

Kodak has also held discussions with bondholders about a bankruptcy financing package, the people said. Cerberus Capital Management LP, a hedge fund that doesn't hold Kodak debt, has also held talks with Kodak on behalf of a group willing to provide the financing, the people said.

(Reporting By Liana B. Baker; editing by Mark Porter, Carol Bishopric; Editing by Richard Chang)