UPDATE 2-Lloyds cuts 985 jobs, bulk in north-west England

* More than half of cuts in Speke, Chester

* Compulsory redundancies a "last resort"

* Unions urge creativity in securing cost savings (Adds Lloyds statement, analyst comment)

LONDON, April 23 (Reuters) - Britain's Lloyds Banking Group (LLOY.L) said it will slash 985 full-time and part-time jobs over the next two years, with compulsory redundancies available as a last resort.

The lender expects the bulk of the job losses to come in northwest England. Up to 200 jobs will go in Speke, near Liverpool, this year and a further 340 positions will be at risk in Chester in 2010.

Other jobs across Britain, including a number in sales, may also be cut, Lloyds said on Thursday.

"Where it is necessary for colleagues to leave the company, it will look to achieve this by making less use of contractors and voluntary severance. Compulsory redundancies will be a last resort," Lloyds said in a statement.

The bank, which says it employs 140,000 people, added that it had already transferred 240 employees in asset finance into alternative roles in the retail division in Speke.

"We shouldn't be too surprised. They've said they're going to cut 15 percent of costs, and a good proportion of that is going to be people," said Fox-Pitt, Kelton analyst Leigh Goodwin.

The Unite union said the decision on layoffs followed months of discussion within the bank about cost-cutting measures after the acquisition of HBOS and in response to the global banking crisis.

"Today the workforce must face the horrendous reality that integration will mean that some will lose their jobs," Unite official Rob MacGregor said in a statement.

Lloyds bought troubled lender HBOS last September in a government-brokered deal.

"With that scale of synergies to be achieved, there's no other way to do it," said Fox-Pitt, Kelton's Goodwin.

The union said it was in negotiations with Lloyds and would oppose any compulsory redundancies.

"The company must be creative in finding means of achieving cost savings, with redeployment and retraining measures as central in its strategy to bring HBOS and Lloyds TSB staff together," it said.

Lloyds has appointed Deutsche Bank to review its insurance operations, including potential disposals, a person familiar with the matter told Reuters last month. (Reporting by Luke Baker, Myles Neligan and Olesya Dmitracova)