AllThingsD's Kara Swisher says Zynga is on the verge of massive layoffs, as a bad year gets worse for the bleeding FarmVille firm. Maybe selling virtual castles is no longer a $7 billion business. Update: Zynga confirms layoffs.

Swisher says Zynga will take "18 percent of its workforce — which represents 520 employees" out to pasture, and shutter "its offices in New York, Los Angeles and Dallas." This is terrible news for 520 people, but doubtfully a surprise for many of them. It's no secret that Zynga is in dire shape: its games are no longer hits, its fans are moving elsewhere, and there just isn't enough money (or interest) to justify its existence.

Update 2: Trading of ZNGA is now halted.

Update 3: Zynga founder and CEO Mark Pincus just sent the following out to the company's staff:

To our Zynga Community,

Today is a hard day for Zynga and an emotional one for every employee of our company. We are saying painful goodbyes to about 18% of our Zynga brothers and sisters. The impact of these layoffs will be felt across every group in the company.

None of us ever expected to face a day like today, especially when so much of our culture has been about growth. But I think we all know this is necessary to move forward. The scale that served us so well in building and delivering the leading social gaming service on the Web is now making it hard to successfully lead across mobile and multiplatform, which is where social games are going to be played.

These moves, while hard to face today, represent a proactive commitment to our mission of connecting the world through games. Mobile and touch screens are revolutionizing gaming. Our opportunity is to make mobile gaming truly social by offering people new, fun ways to meet, play and connect. By reducing our cost structure today we will offer our teams the runway they need to take risks and develop these breakthrough new social experiences.

Because we’re making these moves proactively and from a position of financial strength, we can take care of laid off employees. We’re offering generous severance packages that reflect our appreciation for all of their work and we hope this will provide a foundation as they pursue their next professional steps.

Although these are hard decisions, I’m confident that our strategy of building leading franchises and supporting them with the largest network is the right one for the long term. I’m encouraged by our recent progress. Running With Friends is a great example of the quality player experience we can deliver, already receiving an average 4.5 app star rating from 22,700 players in less than one month after launching. Our FarmVille franchise teams continue to innovate and deliver ground breaking new social experiences like County Fair which, despite only being available on the web, is engaging 39 million monthly players.

I want to thank every one of you for the spirit, creativity and energy that you’ve invested in Zynga. You’ve reintroduced a generation of people to gaming and through these games offered them new ways to connect with their families, make new friends and even sometimes find love.

Everyone will be affected by these changes and I’m sure there will be many follow up questions to this email. If you have specific questions relating to your project or team, please talk to your manager. For any other feedback or thoughts feel free to email me directly.


Update 3: A tipster tells us Zynga's New York staffers were cut without any warning.