UPDATE 5-Barclays boss says banks should stop saying sorry

* CEO Diamond says no decision yet on bonuses, lending

* Britain faces "car crash" on row over banker pay -MP

* Tougher capital rules seen hurting returns by 3-5 pct

* Barclays shares up 5.5 pct at two-month high

(Adds background on government support paragraphs 14 and 15)

By Steve Slater and Sarah White

LONDON, Jan 11 (Reuters) - Banks should stop apologising for the mistakes that helped cause the financial crisis, Barclays Plc's (BARC.L) new boss told British lawmakers, striking a defiant tone in a grilling over bonuses on Tuesday.

In a crammed room that spectators had to queue to enter, American Bob Diamond -- one of Europe's highest-paid executives -- declined to say if he would waive his bonus fo a third year and would not say how much Barclays would lend to businesses.

"There was a period of remorse and apology for banks and I think that period needs to be over. We need our banks willing to take risks ... so we can create jobs," Diamond told the cross-party Treasury Select Committee during 2-1/2 hours of questioning.

Pay was the hot topic, as expected. Britain is heading towards a "car crash" on the issue, according to Jesse Norman, a Conservative Member of Parliament and member of the Committee, who said the public resents seeing a UK bank bonus pool expected to reach 7 billion pounds ($11 billion) for 2010.

The government is struggling to clamp down on banker pay, although Finance Minister George Osborne said he was still seeking a settlement with banks to boost business lending and increase pay transparency, warning that all options were on the table if those talks failed.

"The British people and this government will not accept extravagant bonuses this year without a change in behaviour," Osborne said.

Diamond, who became CEO at the start of the year after running Barclays' investment bank for 14 years, said he was committed "to be responsible and to provide any restraint I can" on pay, but repeatedly said he had to compete against rivals such as Credit Suisse (CSGN.VX) and Goldman Sachs (GS.N) in retaining key staff.

He said there had been no decisions on bonuses or the level of likely lending to businesses in the coming year.

Barclays shares rose 5.5 percent to 292 pence, their highest in two months, after positive comments by analysts at Bank of America Merrill Lynch, dealers said. The European bank sector .SX7P was up 1.9 percent. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For blog on meeting click: link.reuters.com/wed75r For graphics on profit at Barclays by business unit and BarCap profit vs group click on: r.reuters.com/xyk54q CS sets tougher terms on bonuses: [ID:ID:nLDE70904I] Breakingviews comment: [ID:nN10286311] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

FAMILY DECISION

The row about irresponsible pay flared up again in Britain after a weekend report that Stephen Hester, CEO of majority state-owned Royal Bank of Scotland (RBS.L), was set for a 2.5 million pound bonus. The government said on Tuesday it had no power to restrict payouts at RBS this year. [ID:nLDE70904I]

Asked if he would waive his bonus this year, Diamond, who earned 21 million pounds in 2007 but has waived his bonus for the last two years, said he would decide "with his family" whether to accept a bonus if he was awarded one.

Diamond, 59, said taxpayers should never bear the burden when a bank lands in trouble, reflecting global efforts to inflict more pain on bondholders in case a bank hits problems and not bail them out with taxpayer money.

But in one heated exchange he refused to say he was grateful for taxpayer support during the financial crisis, instead acknowledging help from regulators and central banks.

Barclays did not receive direct taxpayer support at the height of the crisis, but data released in December put it among the biggest users of emergency funds from the U.S. Federal Reserve. [ID:nLDE6B112I]

It borrowed $47.9 billion under the Primary Dealer Credit Facility (PDCF), an overnight facility for broker-dealers, after its takeover of Lehman Brothers' U.S. operations at a knockdown price.

Diamond also defended the universal banking model that combines retail and investment banking and which is under pressure internationally from financial regulators, saying it provided more stability.

Yet the new boss may opt to shrink his investment bank and other parts of Barclays with a radical shake-up next month to ditch low-return assets, analysts at UBS said this week. [ID:nLDE7090N7]

Diamond said he will be addressing the challenge of elevating returns above the cost of capital when he releases 2010 results on Feb. 15, and estimated that higher capital requirements would hurt banks' profitability by 3 to 5 percentage points before any mitigating action.

Weaker banks will be harder hit and there is likely to be restructuring in the sector across Europe, he said.

Diamond said he was committed to keeping Barclays headquartered London, after some banks threatened to leave if regulations became too adverse.

($1=.6421 Pound)

(Additional reporting by Michel Rose, Matt Falloon and Mohammed Abbas; Writing by Douwe Miedema; Editing by Louise Heavens, David Holmes and David Hulmes)