UPDATE 7-UK banks set for 40 bln stg bailout - sources

(Recasts with more source comments, BBC report)

By Ralph Gowling and Steve Slater

LONDON, Oct 12 (Reuters) - Britain could pump over 40 billion pounds ($69 billion) into major banks and take big stakes as part of a recapitalization of ailing lenders due to be unveiled early on Monday, people familiar with the matter said Sunday.

Four banks are in line to receive the billions of pounds from investors and taxpayers to boost their capital to prepare them for tough economic times ahead, according to the people familiar with the matter, who declined to be identified.

Crisis talks among the banks, government and regulators ran through Sunday and were due to continue through the night to determine how much capital each would need from the 50 billion pounds offered by Britain last week.

An announcement is expected before markets open on Monday, but details are still being fine-tuned, said the sources.

Royal Bank of Scotland Group Plc (RBS.L) could take more than 15 billion pounds, HBOS Plc HBOS.L could take in 10 billion, Barclays Plc (BARC.L) may seek over 7 billion and Lloyds TSB Group Plc (LLOY.L) about 5 billion, according to industry sources and media reports. The BBC said RBS alone is in line for 20 billion pounds and the total for all four would be 45 billion.

Banks are expected to try to sell shares to existing investors, backed by the government, which would buy the shares not taken by investors.

That could result in the government becoming the biggest shareholder -- and even a majority investor -- in RBS and HBOS.

RBS chief executive Fred Goodwin is widely expected to resign as part of the fund-raising. Earlier this year RBS shareholders had said Goodwin would need to step down if the bank sought to raise more cash. Stephen Hester, chief executive for British Land Co Plc (BLND.L), is seen taking over after joining the RBS board just 11 days ago.

In addition to potentially taking ordinary shares, the government is expected to provide capital in return for preference shares, which could pay an annual dividend of about 10 percent but typically do not have voting rights.

Leaders of other European countries met in Paris and U.S. officials also met on Sunday to discuss options to help ailing banks, racing to throw a lifeline before markets reopen.

SEATS ON BOARDS

The government could take seats on the boards of banks, a government source said on Saturday.

Lloyds, RBS, HBOS and Barclays all declined to comment.

Lloyds is in the process of buying HBOS, and the fund-raising could see Lloyds renegotiate the terms of the deal to reduce the amount paid to HBOS shareholders, especially if the government ended up with a sizable stake of that bank.

HBOS rejected a report late on Sunday that the deal had collapsed, but declined comment on whether it would be altered.

"The deal remains in place and is on track," said Shane O'Riordain, general manager of group communications for HBOS.

British Finance Minister Alistair Darling, attending a G7 finance ministers' meeting in Washington, said on Saturday the government was to give more details early this week about its already announced 400 billion pound banking rescue plan.

The Sunday Times said the scale of the fund-raising could lead to trading at the London Stock Exchange being suspended to give the market time to digest the impact.

The LSE downplayed that prospect, and the World Federation of Exchanges, which represents the LSE and 55 other exchanges, said stock markets should remain open throughout the crisis. [nLC49637]

Talks took place throughout the weekend among banks, the Treasury, the Financial Services Authority and the Bank of England. The scale of the cash required by each would depend on estimates of further losses from their exposure to subprime mortgages and other financial instruments, one source said.

Capital is the cushion a bank keeps to protect its depositors against losses. Many banks ran down their capital in recent years amid a benign economic backdrop, but they have been hit by big losses in the last year and now need to recapitalize in the face of an economic recession.

Britain is offering 50 billion pounds in capital and will guarantee interbank lending by 250 billion sterling to help unfreeze wholesale markets; it is also extending a Bank of England program that swaps banks' risky assets for government debt to provide 200 billion pound of cash to the system.

The multibillion pound package was aimed at stabilizing banks and getting them lending again, but it failed to halt a collapse in share prices.

RBS shares fell over 60 percent last week, and it and HBOS have lost more than three-quarters of their value this year. The broader European bank index .SX7P has halved this year as fears that more banks will fail have been stoked by the deepening financial crisis and the prospect of recession. ($1=.5786 Pound) (Additional reporting by Sumeet Desai and Myles Neligan; Editing by Anshuman Daga, Greg Mahlich and Gerald E. McCormick)