* Labour leader promises to cap banks' market share
* Aims for two new banks after competition review
* Government criticise Labour plan, industry sceptical
By William James and Matt Scuffham
LONDON, Jan 17 (Reuters) - Britain's biggest banks will be forced to sell off branches to make room for new competitors if the opposition Labour party wins the next election, leader Ed Miliband said on Friday, aiming to create two new banks.
He said the move was designed to inject competition into the sector.
With a general election in May next year, Britain's political parties are beginning to fire up policies designed to be popular with voters. Miliband has already called for a freeze on fuel bills, while the Conservatives are calling for a rise in the minimum wage.
Labour is leading in the polls, although an resurgent economy is putting that at risk.
Miliband pledged to break up the financial sector - generally unpopular in many countries because of the financial crisis - by imposing a cap on the market share of personal banking and small business lending that any single institution can have.
"To really change our banking system, we have to get to the root of the decades-long problem in British banking: too much power concentrated in too few hands," Miliband said.
He argued that improving banking sector competition would help small businesses to grow, creating higher-paying jobs and raising living standards.
The plan drew a sceptical response from the industry.
"Forcing people to change bank by selling their local branch is not what customers want," said Anthony Browne, Chief Executive of the British Bankers Association.
People want to choose who they bank with - these proposals would see customers forced by politicians to use a different bank against their will."
Sajid Javid, a minister in the Conservative-led coalition government, said Labour could not be trusted to reform the banks, having overseen a period of deregulation that exacerbated the financial crisis of 2008.
Bank of England Governor Mark Carney said earlier this week that breaking up a bank did not always create competition.
New entrants like Metro Bank, Aldermore and Shawbrook have emerged since the financial crises but are small compared to Britain's biggest five lenders - Lloyds, RBS, Barclays, HSBC and Santander which control 83 percent of retail accounts.
Miliband's speech on banking came a time when a surprisingly strong economic recovery, and below-forecast inflation have blunted Labour's criticism of Prime Minister David Cameron, whose party remain more trusted to manage the economy according to polls.
Tapping into Britons' mistrust of bankers and big business in general, Miliband sought to present his party as a clear alternative to the status quo, under which living costs have risen while wages have remained stagnant.
"The country's got to decide. Do they want a big reckoning and a big reform, or do they want some 'steady as she goes' from this government," Miliband said.
"I'm laying out the choice before people, and the people are the boss, they will make the decision."
Miliband drew parallels between his promise of action against the banks and his pledge last year to freeze prices at Britain's big-six energy firms. That policy wiped billions off the companies' share prices but proved popular with voters.
The Labour plan calls for the details of the banking market share cap to be determined by a competition watchdog review which will be carried out within six months of the election. Labour said the first branches could be sold off within a year.
But, Britain's post-crisis experience suggests that the selloff plan could be difficult to turn into a reality.
The chairman of Royal Bank of Scotland - which is likely to find itself in Miliband's sights - said any forced branch selloff would be "incredibly expensive".
Britain pumped a combined 65 billion pounds into RBS and Lloyds Banking Group to keep them afloat during the financial crisis. Both were subsequently ordered to sell hundreds of branches by European regulators as a condition of their bailout
Lloyds has yet to sell 630 branches that it has rebranded TSB after a sale to the Co-operative Bank fell through. It hopes to float them on the London Stock Exchange this year. A sale of 314 branches by RBS to Santander UK also fell through and RBS is now looking to float that business in 2016.