NEW YORK (Reuters) - Franklin Resources Inc, one of Zale Corp's (ZLC.N) largest shareholders, has shed most of its stake in the troubled jewelry chain since the end of 2009.

Photo: www.zalecorp.com

Franklin Resources owned 4.7 percent of Zale's shares as of February 28, according to a filing on Tuesday 9 March with the U.S. Securities and Exchange Commission, down from 16.4 percent as of December 31, 2009.

That had made Franklin Resources Zale's second-largest shareholder behind Breeden Capital Management LLC, which owns a 28.3 percent stake.

The Dallas-based jewelry chain, the largest in North America by store count, has grappled for more than two years with sliding sales, market share and cash reserves. Last month, Zale hired turnaround expert Peter J. Solomon Co to help it find investors.

Over the holidays, sales at Zale's stores open at least a year fell 12 percent, while same-store sales at its primary rival Signet Jewelers, whose stores include the Kay Jewelers chain (SIG.N) (SIG.L), rose 7.6 percent.

Signet Chief Executive Terry Burman said in a presentation to analysts on Wednesday 10 March that was webcast that Signet's "very weakened" rivals are letting his company win market share, though he did not single Zale out.

Zale has had to cut back on advertising spending during its cash crunch. By contrast, Burman said Signet would raise its marketing budget in 2010. Separately, on Tuesday 9 March, Signet prepaid $50.9 million on its notes.

Burman estimated that about 700 Signet-operated stores, or about half of its U.S. store count, competed head to head in malls with a Zale-owned store.

Zale operates chains such as the Zales Jewelers chain in the United States and the Peoples Jewellers in Canada.

The dates when Franklin Resources sold the shares were not disclosed in the filing, and portfolio managers at the investment firm could not be reached to explain the reason for the stock sales.

Franklin Resources still owns 1.5 million shares, down 71 percent from the 5.3 million shares it owned as of December 31.

On the New York Stock Exchange, Zale rose 32 cents, or 11 percent, to close at $3.23, while Signet was up 6 cents, or 0.2 percent, at $29.82.

Zale's stock has rallied since the company reported better-than-expected profits two weeks ago, but it is down 62.8 percent from its 12-month highs in September.

(Reporting by Phil Wahba; Editing by Robert MacMillan and Richard Chang)