* BoE and PBOC to sign yuan clearing deal on Monday
* London to be first Western centre to clear yuan trades
* Bank of China, ICBC leading contenders to be clearing bank
* Daily turnover of yuan in London around $15.6 bln
* UK government has prioritised China financial links (Adds reaction from HSBC, more background)
LONDON, March 26 Britain and China will sign an agreement next week to set up the first clearing service for renminbi trading outside Asia, putting London in a prime position to offer yuan trade business in Europe.
China has been a key focus of finance minister George Osborne's efforts to boost exports of financial services from Britain, which was the first Group of Seven country to agree a renminbi swap line with the People's Bank of China last year.
Britain's finance ministry said on Wednesday that the Bank of England and PBOC would sign an agreement on renminbi clearing and settlement next Monday, setting out how the two central banks will cooperate on setting up a clearing bank.
There is fierce competition among Europe's major financial centres for yuan trading, with Frankfurt and Luxembourg vying with London to become the top destination.
The deal aims to strengthen London's position, allowing it to attract higher volumes by making it the venue of choice for settling transactions outside the Asian timezone.
"Connecting Britain to the fastest growing parts of the world is central to our economic plan," said Osborne in a statement.
"Other Western countries will follow, but London now has the critical mass of infrastructure, helping to put Britain at the front of the global race."
A British finance ministry source said an announcement on the appointment of clearing banks was not expected next Monday.
A Bank of England spokesman said he had nothing further to add at present.
David Pavitt, head of emerging markets FX trading at HSBC London, said the clearing agreement should be a big positive for London and Europe.
"I would expect this announcement to give participants further confidence in the durability and longevity of the offshore market and being able to transact in renminbi, especially in London and Europe," he said.
Pavitt said the new deal would bring practical benefits by extending the trading hours when clearing is available.
"The process for clearing later in the day is currently a little cumbersome, unlike paying and receiving dollars or euros. This next step should make that process in RMB simpler," he said.
Prime Minister David Cameron and President Xi Jinping discussed cooperation between the two central banks at a meeting on the margins of a nuclear security summit in the Netherlands on Tuesday, Wednesday's statement said.
Osborne said last month that the British and Chinese governments were in discussions about the appointment of a yuan clearing bank in London.
A clearing bank is considered a politically sensitive subject in China, and is usually a domestic entity, with Bank of China and ICBC seen as the leading contenders for this role, according to trade sources last month.
London is the world's largest trade centre for foreign exchange, but it mainly relies on Hong Kong's offshore yuan infrastructure to obtain yuan liquidity and clearing services.
In December, Standard Chartered Bank tied up with Agricultural Bank of China to provide yuan clearing services there.
Pavitt from HSBC said when Singapore signed a similar agreement on yuan clearing with the PBOC last year, it took around six weeks to name the bank handling the clearing.
Britain's finance ministry said 62 per cent of yuan payments outside of China take place in London, citing data from the SWIFT global financial transactions network.
Average daily turnover of yuan-denominated foreign exchange products - including spots, forwards, swaps and options - in London climbed to $15.6 billion in the first half of 2013, more than twice as much as a year earlier, according to the local authority for the City of London. (Additional reporting by Carolyn Cohn, Editing by Mark Trevelyan)