UPDATE 2-UK watchdog to review loan insurance restrictions

* Tribunal orders review of point-of-sale prohibition

* Appellant Barclays says ban limits customer choice * Barclays shares down 2 percent (recasts lead, adds Competition Commission comment, lawyer comment)

LONDON Oct 16 (Reuters) - British bank Barclays (BARC.L) has successfully appealed against a key restriction on the sale of payment protection insurance (PPI), potentially paving the way for its relaxation or removal.

An appeal tribunal on Friday ordered the Competition Commission to reconsider whether a proposed ban on selling PPI alongside personal loans was appropriate.

The ban followed a two-year investigation into complaints over the high price and numerous exclusion clauses in PPI contracts and that a lack of competition was inflating the cost of cover.

A permanent repeal or relaxation of the ban could shore up the revenues of banks and insurers including Lloyds Banking Group (LLOY.L), Britain's biggest PPI provider, which supported Barclays' appeal.

PPI, which allows borrowers to keep up debt repayments if they lose their income, generated sales of 4.4 billion pounds in 2006, according to Competition Commission data.

"We will now study the judgement closely before deciding our next steps," the Commission said.

Barclays, Britain's second-biggest bank, argued the ban would make buying PPI less convenient for consumers, causing a drop in sales.

Paul Edmondson of law firm CMS Cameron McKenna said the ban, announced last January and scheduled to come in to force next year, could cause an "undesirable increase in uninsured borrowers."

"This is a wise decision," he said.

"The Commission should consider whether there are better ways to protect consumers."

PPI was the single most complained about financial product in the first half of the year, the Financial Ombudsman said earlier this month. [ID:nLF508020]

Barclays shares were down 2 percent at 372 pence by 1405 GMT, while Lloyds shares were 1.5 percent higher at 93 pence.

(Reporting by Myles Neligan; Editing by David Cowell)