* Latest charge takes PPI provision to 5.3 bln stg
* Bank says uncertainties remain over ultimate cost
* Consumer group puts industry bill at 12.3 bln stg
* Lloyds Q3 pretax loss 144 mln stg vs 607 mln loss year before
* Shares up 8 pct vs 2 pct gain in European banks
By Matt Scuffham and Steve Slater
LONDON, Nov 1 (Reuters) - Lloyds Banking Group took another 1 billion pound ($1.6 billion) hit to compensate customers mis-sold loan insurance, taking its charge for the scandal to 5.3 billion and dragging it to a third-quarter loss.
Britain's biggest retail bank had already set aside 4.3 billion pounds to repay customers wrongly sold payment protection insurance (PPI), in what has become one of Britain's biggest consumer finance debacles.
Lloyds provisions are far higher than rivals because it had the biggest share of the PPI market.
The bank said on Thursday it had paid out or spent 3.7 billion pounds on the issue by the end of September, or 70 percent of its total provision.
Like other British banks, Lloyds faces multi-billion pound losses to cover wrongly sold insurance on mortgages and other loans, often to people whose circumstances meant they were barred from making claims on the policies.
The PPI scandal is the latest instance of British banks being found to have mis-sold products, a list that includes the sale of specialist financial products known as swaps to small business, some of whom were left with big losses rather than the protection against interest rate moves they expected.
Lloyds has said around half of the PPI complaints it receives are from claims management companies (CMCs), which take a sizeable chunk of the compensation in return for handling the paperwork for clients.
Along with other banks, Lloyds has complained that a high proportion of PPI cases received from CMCs are erroneous and involve individuals who do not even have a policy with the bank.
Lloyds has an army of 6,000 workers dealing with PPI complaints, of which 1,000 are working on false claims.
Around 50 percent of claims from the worst-offending CMCs are invalid, banks say, substantially increasing their overall bill and eating up cash that could be used for lending.
Lloyds declined to say what proportion of its overall provisions are spent on administering false claims.
Britain's Financial Ombudsman Service, which deals with cases where banks and their customers cannot agree a settlement, said last month it is getting up to 400 complaints an hour in relation to PPI.
Lloyds said on Thursday that it had written to the Ombudsman requesting that CMCs should have to pay a fee if they submit complaints which are either bogus or duplicate earlier claims.
But the Ombudsman said that of the 158,000 PPI complaints it received last year, less than 6,000 were erroneous. It also said 98 percent of complaints against Lloyds were upheld in favour of the customer, the highest rate of any bank.
The total cost of payouts for the industry could hit 15 billion pounds, analysts estimate, and some say Lloyds' final PPI bill could rise to as much as 7.6 billion. Barclays said earlier this week it took a PPI-related charge of 700 million pounds in the third quarter, taking its total to 2 billion.
Consumer group Which? puts the current bill for the industry at 12.3 billion pounds. It has called on banks to provide more clarity on how many more complaints they are expecting and publish monthly updates on the amounts that have been paid back.
"The banks have been in denial about the true scale of this scandal. Their piecemeal approach to topping up provisions is an inadequate response to what is now the biggest financial mis-selling scandal of all time," said its chief executive, Peter Vicary Smith.
On a more positive tack, Lloyds announced falling losses from loans that turn sour and said its cost-cutting programme was ahead of target.
The bank has reduced its loan book, cut costs and reined in bad debts as part of a recovery plan devised by Chief Executive Antonio Horta-Osorio after taxpayers bailed out the bank in 2008 leaving Britain with a 40 percent stake.
Lloyds reported a pretax loss of 144 million pounds for the three months to the end of September, compared with a loss of 607 million a year earlier. However, its underlying profit rose to 840 million pounds from 419 million a year before.
Shares in Lloyds were up 8 percent to 43.9 pence at 1545 GMT, outperforming a 2 percent rise in the European banking index, as progress in the bank's recovery plan overshadowed the increased cost of correcting past mistakes.