* Chairman Agius says "the buck stops with me"
* CEO Diamond to fight on, faces grilling on Wednesday
* Government launches parliamentary inquiry
* Libor scandal threatens to widen to more banks
By Steve Slater and Matt Falloon
LONDON, July 2 (Reuters) - Pressure grew on Barclays Plc Chief Executive Bob Diamond to quit as Britain launched an inquiry on Monday into a market-rigging scandal, saying a "culture that flourished in the age of irresponsibility" among bankers had to end.
Barclays Chairman Marcus Agius resigned on Monday, saying "the buck stops with me" as the scandal over manipulating Libor interest rates claimed its first major scalp.
But his departure did not take the heat off Diamond, who ran Barclays' investment banking arm when the rate rigging took place, drawing a record fine for the lender last week in a scandal likely to involve many more banks.
"The buck in Barclays stops with Bob Diamond, and it is Bob Diamond who must accept responsibility," said John Mann, an opposition Labour member of a parliamentary committee that later this week will question Agius and Diamond.
"He must resign. He's got to go," Mann told Sky News.
Anger with the culture of bankers in London, a world financial capital and major part of the British economy, crossed the political divide with Conservative finance minister George Osborne outlining the parliamentary inquiry.
"The behaviour of some in the financial services has damaged the reputation of an industry that employs hundreds of thousands of people and is vital to the economic prosperity of the country," Osborne told parliament. "It's time to deal with the culture that flourished in the age of irresponsibility and hold those who allowed it to do so to account."
Barclays has admitted that some of its traders tried to manipulate the London Interbank Offered Rate (Libor), which is used worldwide as a benchmark for prices on about $350 trillion of derivatives and other financial products across a range of currencies and loan durations.
In a letter sent to staff on Monday, Diamond said: "No one is more sorry, disappointed and angry about these events than I am."
The bank had let down customers, clients, shareholders, regulators and the communities, and it was reviewing those responsible, he said. "We have the full range of tools at our disposal, from clawing back compensation to asking people to leave the bank," the letter said.
Prime Minister David Cameron has called the scandal "extremely serious," and on Monday demanded action "right across the board."
The cross-party inquiry, due to start within days and to report by the end of the year, will have free rein to call witnesses under oath from the worlds of finance and politics and will influence the government's reform of the financial sector.
It could result in bank bosses being held to account by law for the actions of rogue staff, while a separate and independent review of the way interest rates are set and regulated in financial markets will also feed into new banking legislation.
Agius, 65, apologised on Monday.
"Last week's events - evidencing as they do unacceptable standards of behaviour within the bank - have dealt a devastating blow to Barclays' reputation," he said. "I am truly sorry that our customers, clients, employees and shareholders have been let down."
Britain's Serious Fraud Office, a government agency, said it would decide within a month whether to press criminal charges against any of the banks under investigation.
The record fine imposed on Barclays showed the financial industry needed a fundamental rethink, the Financial Services Authority said: "Perhaps the reaction to the penalty imposed last week on Barclays will be a watershed moment, the point when the industry realises that it also has to rise to the challenge and to recognise that things have to change," said Tracey McDermott, acting head of enforcement at the FSA.
The affair comes at a time when banks - already under fire for their role in the financial crisis - are facing a new wave of public outrage over a systems outage at RBS last month and evidence of mis-selling financial products.
Fined $453 million by U.S. and British authorities, Barclays is the first bank to settle in an investigation that is looking at more than a dozen other banks, including Citigroup, UBS and RBS.
HSBC said that as a bank that contributes to setting the Libor interest rate it was providing information to authorities, but the FSA said it was not investigating the bank.
"Barclays has become the poster child for this because they have been the first to be assessed by the regulators," Euan Stirling of Standard Life Investments, a major investor which holds some 2 percent in Barclays, said on BBC radio. "I think this is going to spread far and wide through the industry."
The Conservative-Liberal Democrat coalition government came under fire for not establishing an independent inquiry into the banking sector, similar to the current Leveson inquiry, which is investigating standards in the media following a scandal over journalists hacking mobile phone voicemails.
However, some ministers may be wary of any investigation that could make their own planned overhaul of the industry's regulatory regime look inadequate.
The Labour Party has threatened to force a vote in parliament on whether there should be an independent inquiry, joining critics who argue that a parliamentary investigation would struggle to gain the respect of voters.
"We will continue to argue for a full and open inquiry, independent of bankers and independent of politicians. That is the only way, in my view, that we can rebuild trust in the City of London and financial services," Labour leader Ed Miliband said.
Barclays shares closed up 3.4 percent, outperforming a 2.5 percent rise by the European bank index. The exit of Agius was not seen as a big blow, analysts said, and a 17 percent share price crash in the past three trading days looked excessive in light of the hit the bank is likely to suffer.
Lawmakers are likely to quiz Agius and Diamond this week on what the Bank of England (BoE) and other regulators knew about the rate-rigging. Diamond will appear before the parliamentary committee on Wednesday and Agius on Thursday.
The hearings could prove embarrassing for the central bank, after sources told Reuters a conversation in October 2008 cited in documents released by U.S. authorities last week was between Diamond and BoE Deputy Governor Paul Tucker.
Some people at Barclays mistakenly believed they had been granted permission to submit artificially low rates for Libor after the conversation, the documents showed.
"It is nonsense to suggest that the Bank of England was aware of any impropriety in the setting of Libor," a BoE spokesman said. "If we had been aware of attempts to manipulate Libor we would have treated them very seriously."
Barclays has admitted it submitted artificially low estimates of its borrowing costs from late 2007 to May 2009 because it thought rivals were doing the same, and higher submissions would make it appear to be in trouble.
Barclays said it would launch an audit of its business practices, led by Michael Rake, its senior independent director, who will move up to the post of deputy chairman.
Rake is seen as a strong candidate to become Barclays' next chairman - especially as he was not appointed to lead the search for a successor - although he already chairs BT Group and easyJet, and may have to give up those jobs.