By Tom Westbrook

SINGAPORE (Reuters) - Shares in Australia's Afterpay Ltd <APT.AX> and its smaller consumer lender rivals tumbled for a second day on Wednesday, as the entry of U.S. giant PayPal into the buy-now-pay-later (BNPL) sector sent investors scrambling to re-price its frothy stocks.

Afterpay fell as much as 12.4%, before paring losses, and has shed about A$2.5 billion ($1.84 billion) in market value in the two trading sessions since PayPal Holdings Inc <PYPL.O> said it would offer small, short-term interest-free loans to U.S. customers.

Rivals also tumbled, with Zip Co Ltd <Z1P.AX> dropping as much as 17.8% and Sezzle Inc <SZL.AX> 15.5% before both trimmed losses. They have each shed roughly 20% in two days. Openpay Group Ltd <OPY.AX> slid 10% and Splitit Ltd <SPT.AX> fell 4.6%.

The broader market <.AXJO> ended 1.8% higher.

"Having such a large customer base already in the U.S., PayPal certainly throws a spanner in the works for their expansion plans," said James Tao, a market analyst at CommSec in Sydney.

These alternative credit firms, which offer small instalment loans to shoppers and make money by charging merchants a commission, are riding an online shopping boom sparked by the coronavirus pandemic.

A near 10-fold rally in Afterpay's share price since March has catapulted the company into Australia's top 20 largest listed firms, even though it has never turned a profit.

The United States is seen as the sector's largest growth market and is a key focus for most of the Australia-listed companies.

PayPal's offering is for purchases between $30 and $600, repayable in four instalments over six weeks and is broadly similar to Afterpay's product.

The companies have sought to reassure investors and downplayed the potential impact of PayPal on their prospects.

Afterpay co-founder Anthony Eisen said in a statement that competition "from traditional and newer players" would not change the company's strategy "or diminish our global opportunity".

The chief executives of Zip Co, Sezzle and Splitit, in separate statements, said they were broadly prepared for competition in the sector and that PayPal's entry underscored its relevance and potential.

Openpay's CEO Michael Eidel said "happy is maybe not exactly the right term but we welcome it," adding that the entry will help grow the sector "into people's minds and into people's wallets and that's good news for us."

Michael Smith, director of Kauri Asset Management in Sydney, which owns Afterpay stock, said the sector had already survived last year's entry of Visa Inc <V.N> and was well placed.