(Adds prime minister comment, updates shares, headline)
By Byron Kaye
SYDNEY, Nov 1 (Reuters) - Shares of Australia's biggest listed aged care providers bounced back from early losses on Friday after a government-backed inquiry sharply criticised care of the elderly and vulnerable, raising expecations of a far-reaching regulatory overhaul.
The Royal Commission inquiry, released after the market close on Thursday, called for a fundamental overhaul of Australia's aged care system after an almost year-long investigation of the A$20 billion ($14 billion) industry.
"The neglect that we have found in this Royal Commission, to date, is far from the best that can be done," commissioners Richard Tracey and Lynelle Briggs said in the report. "Rather, it is a sad and shocking system that diminishes Australia as a nation."
A previous Royal Commission into misconduct in Australia's financial sector has had wide-ranging repercussions, including structural changes to wealth management businesses and lawsuits brought against institutions and individuals by regulators.
Shares in Regis Healthcare Ltd, the second-largest aged care operator by market value, fell as much as 6% in early trade, but recovering to close down 1.6%, while rival Japara Healthcare Ltd fell 2% before bouncing back to close up 6.5%.
Shares of another operator, Estia Health Ltd, traded lower before closing up 2.4%.
All four stocks were seen until early 2018 as attractive because of their exposure to Australia's ageing population, but have been sliding since media reports alleged widespread patient mistreatment. The stocks are still below early 2018 levels.
Macquarie Group analysts said in a note that listed aged care operators would see tough conditions until the inquiry ended in a year, and "complex issues are being thoroughly examined to evolve the industry into a sustainable sector".
However, they added that in the short term the companies could provide value by taking steps such as cutting debt and overheads and refurbishing facilities, while there was also potential for takeovers.
The report prompted the federal government to promise additional funding for some parts of the sector, although it held off on saying how it would respond to the inquiry until it delivered its final report, due Nov. 12, 2020.
"We have seen abuses and we're seeing substandard care across all fields," Prime Minister Scott Morrison told radio station 3AW.
Morrison said the government would unveil new funding for in-home patient care by the end of the year.
The Council on the Ageing Australia said it welcomed the report's recognition that older Australians are being neglected by the system which supports around 1.3 million people each year.
Reporting by Byron Kaye and Melanie Burton; editing by Jane Wardell and Richard Pullin