* Watchdog set to launch full investigation in autumn
* Could force divestments in 2016; Lloyds, RBS most at risk
* Lack of competition in current accounts, business banking
* Big 4 banks have 77 pct of current accounts, 85 pct of business accounts
* RBS falls 1.7 pct, Lloyds down 0.7 pct (Adds opposition MP, analyst comments, details)
By Steve Slater
LONDON, July 18 Britain's big banks could be broken up after the country's new competition watchdog set out plans for an 18-month investigation into services for small business customers and personal accounts because of a lack of competition.
The Competition and Markets Authority said banks have not done enough to meet the needs of retail customers or small and medium-sized businesses, such as making it easier to switch banks or providing clear information on fees.
The review will mark the latest attempt to open up banking in Britain to more competition and is also likely keep the banks in the political spotlight ahead of next year's election.
The CMA, which became Britain's new competition watchdog in April, has the power to order a break up of banks considered too dominant, as well as so-called behavioural remedies, such as improving information given to customers.
State-backed Lloyds Banking Group and Royal Bank of Scotland, the biggest banks for both personal accounts and business banking, are most at risk of being told to cut their market share, potentially by selling more branches.
"Our studies have found that despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks," Alex Chisholm, CMA chief executive, said.
A full investigation had been widely expected. It would take about 18 months, so it would be early to mid-2016 before any remedies were proposed.
Britain's big four banks, which also include Barclays and HSBC, hold 77 percent of the 65 million personal current accounts in Britain, and have 85 percent of the 3.5 million business current accounts and provide nine out of every 10 business loans, the CMA said.
Current or personal accounts brought in about 8.1 billion pounds ($13.8 billion) of revenue last year for the banks - or about 125 pounds per customer. Revenue from small business accounts was well over 2 billion pounds,the watchdog said.
Shares in RBS fell 1.7 percent by 1100 GMT, the weakest stock in the European bank index. Lloyds shares fell 0.7 percent and Barclays and HSBC were both weaker, broadly in line with the bank sector.
Lloyds and RBS are already being forced to sell more than 900 branches between them by European regulators.
Analysts said these two were unlikely to have to shed much more of their networks, but they could have to cut into pockets of strength. That could include business banking in Scotland, where RBS has 39 percent of the market and Lloyds 30 percent.
An investigation may also raise the threat of more political interference ahead of a general election due by May.
"A break up thesis will definitely make its way into political manifestos and news flow is likely to remain volatile for the banks in this space," Bernstein analyst Chirantan Barua, said.
Ed Balls, shadow finance minister for the opposition Labour Party, wants to impose market share caps on banks and welcomed a possible full industry investigation.
"Ministers claim there is no problem to solve, but everyone else recognises that we have a lack of competition in our banking sector," Balls said.
UK authorities have been trying to increase competition in business banking services for 15 years, but the CMA said concentration among the big banks had not changed much.
It said barriers to entry for newer and smaller banks remain significant, there is little movement in the market share of big banks, customers see little difference between the services on offer from the big banks, and there is little transparency to compare prices such as overdraft fees.
As a result, levels of switching are low. Only 3 percent of personal current account customers switch each year and only 4 percent of small businesses change bank, the CMA said.
The Federation of Small Businesses said the investigation of business banking should force banks to "up their game" and wants barriers to entry for new banks to be reduced, including for alternative finance providers.
"The goal should be to deliver a market structure that encourages far more dynamism, choice and innovation," John Allan, the FSB's national chairman, said.
The CMA said it would make a final decision in the autumn and has given banks and other market participants until Sept. 17 to submit their views. It would be highly surprising if the investigation did not go ahead.
The big four banks had proposed improving competition in business banking by setting up a comparison website to increase transparency and make it easier for companies to switch banks, but the CMA said that would not appear to go far enough.
It would mark the second full-blown industry investigation being carried out by the CMA, after saying last month it would investigate competition among energy suppliers. ($1 = 0.5851 British Pounds) (Additional reporting by David Milliken; Editing by John Stonestreet and Jane Merriman)