(Reuters) - Goldman Sachs downgraded Internet holding company IAC/InterActive Corp to "sell" from "neutral" on increasing competition in the search business.

The company's shares fell as much as 10 percent to $42.56 on the Nasdaq on Tuesday morning.

Goldman said IAC is facing rising competition from AOL Inc and Demand Media Inc, which compete with IAC's business of buying search ads directing users to similar search result pages on Ask.com.

The brokerage expects higher competition to hurt IAC's revenue and margins. It cut its price target on the stock to $42 from $53.

Goldman also said the recent changes to Internet search giant Google Inc's policies could hurt IAC's search business.

The European Union gave Google four months in October to make changes to its policy, including better informing users on how data will be used, and setting precise periods for data to be retained.

Google said in January it was simplifying its privacy policy, consolidating 60 guidelines into a single one that would apply for all its services, including YouTube, Gmail and the Google+ social network.

The company also said it would pool data it collects on individual users across its services, allowing it to better tailor search results and improve service. Users cannot opt out of the new policy if they want to keep using Google's services.

"With recent changes to Google policies, we believe the risk of additional restriction around search redirection and arbitrage programs is rising," analyst Heath Terry wrote in a note.

(Reporting by Chandni Doulatramani in Bangalore)