* New 1.8 billion pounds charge for PPI mis-selling
* To ask regulator in H2 to restart 'modest' dividends
* Preparations for second share sale have begun
* Sale to institutions likely before retail offering
* Shares close down 4 percent
By Matt Scuffham
LONDON, Feb 3 (Reuters) - Lloyds Banking Group dashed investors' hopes of receiving a dividend for 2013 after it took a further 1.8 billion pound ($3 billion) mis-selling charge that will blunt its ability to make shareholder payouts until next year.
The British bank, which last paid a dividend in 2008 before it was rescued by taxpayers during the financial crisis, said on Monday it expected to apply to the regulator in the second half of the year to restart dividend payments.
Most analysts and investors had expected the bank to announce a small dividend for 2013 alongside its full-year results later this month. A resumption of dividend payments would make the bank's shares more attractive to investors and help to smooth government efforts to sell its remaining 33 percent stake.
Finance Minister George Osborne wants to sell the stake before the next election in 2015 and is keen for some of the shares to be offered to the public.
The Treasury and UK Financial Investments, which manages Britain's stakes in Lloyds and Royal Bank of Scotland, are continuing to assess options for future share sales and have not made a final decision.
Banking and political sources said the most likely scenario continues to be a second sale of Lloyds' shares to institutions such as pension funds and insurers in March or April. One source said that up to 10 percent of the shares could be sold.
A bigger sale targeting private retail investors is expected later in the year and would mark a milestone in Britain's recovery from the crisis, when taxpayers pumped a combined 66 billion pounds into the two banks.
Andrew Tyrie, chairman of the parliamentary committee that scrutinises the country's finance ministry, said the government must try to get the best deal for the taxpayers but stressed the need for urgency.
"Indefinite public ownership is certainly not the way forward, with all the pressures and temptations to meddle that come with it," he said on Monday.
Lloyds said last October it would set out its dividend policy alongside its 2013 results, but had not stated when it expected to restart payments.
The bank's shares closed down 4 percent, underperforming a 2.6 percent fall in the European banking index.
Lloyds rushed out an unscheduled trading update on Monday ahead of full-year results on Feb. 13, flagging the new charge for mis-selling loan insurance. That takes the total it has set aside to compensate customers mis-sold payment protection insurance (PPI) to 9.8 billion pounds - the most of any bank.
PPI was sold by banks and other lenders to millions of customers. But the policies were discredited when it emerged many borrowers were ineligible to claim on them - leaving the industry with a 20 billion pound compensation bill.
Finance Director George Culmer declined to comment on whether the bank would have been able to pay a dividend for 2013 if it had not taken another mis-selling charge.
State-backed rival Royal Bank of Scotland also published an unscheduled update last week, saying it would take 3 billion pounds of new charges to cover the cost of past misconduct.
Despite its latest mis-selling setback, Lloyds remains much closer to returning to private hands than RBS, which is could be three to five years away from privatisation.
Lloyds is preparing a prospectus for the sale of government-owned shares to the public after the state raised 3.2 billion pounds via a 6 percent stake sale in September.
Culmer told reporters that process was "pretty well advanced".
Deutsche Bank analyst Jason Napier said Lloyds' dividend announcement raised questions over the timing of a sale. "We and many investors we talk to had thought that a return to a modest dividend at 2013 was a 50/50 outcome. For some therefore, capital return may be 6-12 months later than expected."
Starting from a small base next year, Lloyds is aiming to build up its dividend payouts to a ratio of at least 50 percent of sustainable earnings in the medium-term.
"The 50 percent ratio is good but some people had hoped for as much as 70 percent in 2015 and that looks ambitious now," one of Lloyds biggest 50 institutional investors said.
Lloyds said underlying profit was 6.2 billion pounds in 2013 and it expects to announce a "small statutory profit before tax" when it publishes its full-year earnings.