UPDATE 2-Funding withdrawal wipes $1.6 bln off UK housebuilders
* BoE to refocus FLS away from mortgage lending
* Barratt Dev, Persimmon shares tumble by 6-10 pct
* Industry groups say lenders strong enough without FLS
By Brenda Goh and Paul Sandle
LONDON, Nov 28 (Reuters) - Shares in Britain's housebuilders fell sharply on Thursday, wiping up to 1 billion pounds ($1.6 billion) off the sector, after the Bank of England unexpectedly cut a mortgage support scheme to avoid a housing bubble.
Shares in Barratt Developments, Britain's biggest housebuilder by volume, tumbled almost 10 percent while Persimmon, the largest builder by market value, fell over 6 percent.
An hour after the central bank said it would refocus its Funding for Lending Scheme (FLS) on helping small firms, more than 1 billion pounds had been wiped off the eight biggest listed British housebuilders. The country's 10 biggest housebuilders build about two-thirds of new homes annually.
By 1319 GMT, housebuilder shares had pared some of the losses to be down 2-5.3 percent, with Redrow the only riser, up 0.31 percent, against a wider 4.5 percent fall in the Thomson Reuters UK Homebuilding index.
A lobbying group for the sector said it thought the withdrawal of support had come too soon, but the Home Builders Federation, which represents Britain's biggest housebuilders, and the Council for Mortgage Lenders (CML), another industry group, shrugged off the announcement.
They said the improved economy, combined with Help to Buy, another government scheme, meant that lenders were in a much stronger position than when FLS was introduced in July 2012.
"Although the changes to the FLS may be a surprise, they are not a shock," CML's director general Paul Smee said.
"Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust."
Jefferies analysts described the share price falls as an "overreaction," saying that FLS usage had already been falling.
Housebuilders have seen their share prices more than double over the past two years thanks to government efforts to kick-start the housing market following the global financial crisis.
The BoE and Britain's finance ministry launched the FLS in a bid to up lending to home buyers and businesses. The scheme allows banks and building societies to access cheap credit from the BoE in proportion to how much they increase lending by.
In March this year, the government provided a further boost to the sector through Help to Buy, a scheme which sees it lend and guarantee billions of pounds in loans to help Britons purchase homes with deposits as small as 5 percent. This scheme will remain in place.
House prices are now rising at an annual rate of nearly 7 percent on some measures, above their long-run average, fuelling fears of a bubble amid criticism that the schemes are boosting demand without helping supply.
The FLS will now focus solely on enabling greater lending to small firms that still find it hard to borrow and BoE Governor Mark Carney said the Bank was ready to take more measures to control the housing market if needed.