* Reports say Lloyds considering 15 bln stg cash call
* Two top 10 investors question viability
* Lloyds says in talks about insurance scheme participation
* Lloyds shares fall 4.1 percent
(Adds further details)
By Raji Menon and Steve Slater
LONDON, Aug 10 Two top shareholders of Lloyds Banking Group Plc (LLOY.L) showed little appetite for a cash call amid reports the lender might seek billions of pounds from a rights issue to avoid the cost of a scheme to insure bad debt.
Lloyds, 43 percent owned by the UK taxpayer, agreed earlier this year to include 260 billion pounds ($433 billion) of risky assets in the British government-backed insurance scheme, to shield it from massive losses if the recession deepens.
Signs of an improving UK economy, optimism over its first-half results last week and a confident outlook for bad debts have prompted questions over its participation in the so-called Asset Protection Scheme (APS).
Two top shareholders said on Monday they were uncertain if the bank could raise the extra cash through rights issue, or indeed whether it would be worthwhile sidestepping the scheme.
"We really don't see how this could be made to work," one top 10 shareholder, who declined to be named, told Reuters.
"I also think it would be quite surprising if there is that much appetite for Lloyd's stock. I really can't see how they could engineer this at all."
Newspaper reports over the weekend and on Monday said Lloyds -- which raised 4 billion pounds from shareholders earlier this year -- could raise up to a further 15 billion, sending its shares down as investors fretted over potential dilution and the impact of reduced protection.
Industry sources and analysts said the bank could instead gauge appetite for a rights issue to avoid the 15.6 billion pound cost of the government insurance.
Lloyds' stock lost 4 percent to 97.95 pence by 1516 GMT, lagging a European banking sector .SX7P that shed 0.4 percent. Shares in Royal Bank of Scotland (RBS.L) -- the only other bank to have signed up for the APS -- were down 7.8 percent.
Another top 10 investor said there were too many variables, including the government's own willingness to participate -- a critical issue, given its more than 40 percent stake in Lloyds.
"Why are they doing this? Is this because they genuinely think the worst is over or is it because they don't want to pay a hefty fee for the government's protection? I just don't think it's a fait accompli yet," the investor said.
Headline numbers would support arguments for a withdrawal.
Credit Suisse analysts said in a note its estimates suggested the scheme's payments to Lloyds and RBS -- just over 10 billion pounds over the next five years -- would dwarf 32 billion pounds paid up in fees.
But without the APS, Credit Suisse said the banks would, for example, have to raise up to 40 billion pounds of capital between them to satisfy regulatory stress tests and could also be liable to pay for the government's helping hand so far.
Lloyds said in a statement on Sunday it was working with the Treasury on the terms of its intended participation in the scheme and expected "to conclude these discussions and agree terms that are in the best interest of shareholders".
The bank declined to comment further on Monday.
EU HOLDS THE KEY?
Analysts, however, said the European Union could yet hold the key to Lloyds' decision -- particularly if it toughens threats to force the bank to sell assets or limit market share.
"The elephant in the room is what the EU decides to do with Lloyds' business model," said Simon Maughan, analyst at MF Global. The risk that investors miss out on those long-term rewards could encourage them to support a cash call, he said.
"The shareholders' arms could be twisted here."
The merits of a rights issue over the APS would likely hinge on the outlook for bad debts, and prospects remain grim despite Lloyds' optimism that it is through the worst. RBS warned on Friday it could be years before impairments subside.
"For it to have legs you've got to believe the loss severity on APS assets would be much lower than estimated three months ago. I'm most unconvinced," said Ian Gordon, analyst at brokerage Exane BNP Paribas. "It would be an astonishing U-turn.
RBS's poor financial shape means it has little option but to sign up, despite a 6.5 billion pound fee, billions of pounds of "B" shares and a hefty fiscal cost.
Lloyds credit default swaps, which measure costs of insuring against Lloyds defaulting on its loans, were tighter. [ID:nLA195767] (Additional reporting by Clara Ferreira-Marques; Editing by Greg Mahlich and Gilbert Kreijger)