UPDATE 2-RBS chief waives bonus after UK political storm
* Deal provoked row across political spectrum
* Labour had said it would force debate on the bonus
* Conservatives tried to deflect criticism on to Hester
LONDON, Jan 29 (Reuters) - The chief executive of Royal Bank of Scotland has decided to waive a bonus worth almost one million pounds ($1.6 million), the bank said on Sunday, after the handout angered Britons bearing the brunt of government austerity measures.
A spokesman for the partly state-owned bank said CEO Stephen Hester would no longer be taking the bonus, which was awarded at a time when most British workers are suffering wage freezes or sub-inflation rises.
"He's waived the bonus," said the spokesman for RBS, which is 83 percent owned by the British government following a state bailout during the 2008 credit crisis.
Hester had been due for the stock bonus, worth roughly 998,640 pounds based on Friday's closing price of RBS shares, on top of his basic salary of 1.2 million pounds. His decision followed a similar move by RBS Chairman Philip Hampton.
The deal provoked a row across Britain's political spectrum, with the opposition Labour Party leading the attack.
The Liberal Democrat party, junior partner in the coalition government, also criticised the decision and even some members of Prime Minister David Cameron's Conservatives joined the assault.
RBS made its announcement shortly after Labour stepped up the pressure by saying it would force a parliamentary debate when it would have called on the government to use its 83 percent stake in RBS to cancel Hester's bonus.
Salaries at RBS and Lloyds are particularly controversial as both banks were bailed out with 66 billion pounds of taxpayers' money during the crisis. The British government owns 40 percent of Lloyds, along with its RBS stake.
Throughout the past week the Conservatives - the senior coalition party - had sought to deflect criticism over the government's handling of the affair by saying it was up to Hester to decide whether or not to take up his bonus.
The government had said overruling the RBS board would risk destabilising a bank whose balance sheet is as large as Britain's entire economy. It also pointed out that the bonus scheme had been drawn up under the previous Labour government.
Hester, a former Abbey National and Credit Suisse banker, joined RBS in October 2008 from property company British Land as RBS was reeling from its disastrous acquisition of Dutch bank ABN AMRO and the effects of the credit crisis.
Britain used about 45 billion pounds of taxpayers' money to rescue RBS, leading to the eventual resignation of former head Sir Fred Goodwin, who was replaced by Hester.
Hester was given a brief to restructure RBS and restore its fortunes, and the bank has cut more than 30,000 jobs under him.
Like many banks, RBS's share price has fallen sharply over the last year, which again made Hester's bonus hard to justify.
Britain aims to sell its state holdings in RBS and Lloyds back to the private sector, although volatile markets have meant the timing of any disposal is uncertain.