By Lewis Krauskopf and Ransdell Pierson

(Reuters) - Eli Lilly and Co withdrew its sepsis drug Xigris from all markets after the product, deemed a potential big seller when it was approved a decade ago, failed to improve survival in a clinical trial.

Sepsis is a severe, often life-threatening illness caused by the immune system's over-aggressive response to infections -- releasing inflammatory proteins that cause shock and shut down multiple organs. The condition occurs in 1 to 2 percent of all hospitalizations in the United States.

Approved in the United States in 2001 and in Europe in 2002, Xigris never reached its initial lofty sales expectations. The intravenously infused drug, also known as drotrecogin alfa, had global sales of about $100 million last year.

Xigris has increased the risk of serious bleeding in earlier studies, although no significant higher risk was found in the latest study.

"While there were no new safety findings, the study failed to demonstrate that Xigris improved patient survival and thus calls into question the benefit-risk profile of Xigris and its continued use," Timothy Garnett, Lilly's chief medical officer, said in a statement on Tuesday.

Patients currently receiving Xigris treatment should stop, while doctors should not start any new patients on the drug, Lilly said.

The failed study, called PROWESS-SHOCK, comes only two days after Lilly's top-selling Zyprexa schizophrenia treatment lost U.S. patent protection in the United States -- making it prey to cheaper generics.

The PROWESS-SHOCK study began in March 2008 as a condition for continued market authorization in Europe.

Results of the 1,696-patient study showed Xigris did not meet the main goal of a statistically significant reduction in deaths from any cause over a 28-day period in patients with septic shock.

According to European Medicines Agency, 26.4 percent of patients taking Xigris died compared with 24.2 percent taking a placebo, a difference that was not deemed statistically significant.

The risk of severe bleeding events in the study, the main risk with Xigris, was similar, "suggesting there was no increased harm" from the Lilly drug, according to the European regulators.

Garnett noted that Xigris has increased the risk of serious bleeding in earlier studies.

Xigris has been used on top of standard treatments, most notably intravenous fluids and antibiotics.

In large studies conducted more than a decade ago, Xigris did significantly cut mortality, Garnett said.

But in recent years, medical practice has greatly improved in intensive care units, Garnett said. Faster and more aggressive treatment with IV fluids and antibiotics has sharply improved survival rates of sepsis patients.

"So the incremental benefit of Xigris is no longer apparent, and no longer clinically relevant," Garnett said.

Lilly estimated it would take a charge tied to the withdrawal in the range of $75 million to $95 million in the fourth quarter, or about 5 cents per share after taxes. It maintained its full-year profit forecast that excludes special items.

Lilly shares were down 1.2 percent at $37.73 on Tuesday morning on the New York Stock Exchange.

(Reporting by Lewis Krauskopf and Ransdell Pierson in New York, editing by Gerald E. McCormick, Matthew Lewis and Derek Caney)