UPDATE 1-Possible payment on Bradford & Bingley CDS debated

* Unclear if missed B&B payments to trigger credit event

* Trade body ISDA yet to receive query

* B&B decision hits subordinated bond market

(Adds ISDA reaction)

By Natalie Harrison

LONDON, May 27 (Reuters) - Credit analysts and traders were uncertain on Wednesday whether a decision by Bradford & Bingley (BB_p.L) not to pay interest on 325 million pounds' ($517 million) worth of subordinated bonds would trigger a CDS event.

If deemed a default, the missed payments could trigger a payment under credit default swap contracts.

The failed lender said late on Tuesday it would not pay coupons on three sterling-denominated issues, including a 150 million pound Lower Tier 2 bond due to mature in 2054, a 125 million pound LT2 bond due in 2023 and a perpetual 50 million pound Upper Tier 2 bond, B&B said.

Payments are due in June and July.

The International Swaps and Derivatives Association (ISDA), which is involved in CDS auctions, said that it had not received a query as to whether the B&B decision will trigger the payments.

"If a question were to be referred, it would be reflected immediately on the DC (determinations committee) homepage and subsequent actions reported there," ISDA said.

B&B said in February it would pay coupons on its subordinated debt issues due in March, April and June, even though the Treasury had said the lender could skip the payments without triggering a default.

"Those payments will be honoured. Payments that will not be paid are subsequent to that," a spokesman for B&B said.

The B&B decision had a negative impact on UK subordinated bond prices as it raised concerns that other financial institutions in which the government has large stakes could follow suit.

British authorities last year bought the buy-to-let mortgage lender's portfolio, which had a heavy exposure to wholesale credit markets, and sold its deposits and branches to Spanish bank Santander (SAN.MC).

Tier 1 debt, the lowest ranked bank debt, of Royal Bank of Scotland (RBS.L), Lloyds (LLOY.L) and HBOS were 1 to 2 basis points lower, a trader said.

"There is a some weakness with bids pulled back, but there is not a lot of selling at the moment. People are just trying to work out whether this is a CDS event. It's very cloudy," said the trader.

Credit analysts at Royal Bank of Scotland said it was difficult to see how the decision would not constitute a CDS event.

"ISDA fired a warning shot across the bows of Bradbi, indicating that now that non-payment of coupon is possible, the next time they do not pay and if it's considered because of credit deterioration it could be a trigger event," RBS credit analysts said in a research note.

"The extra 'AND' could be contestable but it's going to be hard to argue that there has been no credit deterioration over the last 3-4 months," RBS added. ($1=.6288 Pound) (Additional reporting by Tom Freke; editing by Simon Jessop)