UPDATE 3-Britain's UKFI says bank disposals to take years

* Report says no fixed timetable for share sales

* Chairman sees first sales within a year

* Expects a number of deals over several years

* Says unrealised loss for taxpayers is 10.9 bln stg

(Adds UKFI chairman comment, updates shares)

By Myles Neligan and Douwe Miedema

LONDON, July 13 (Reuters) - Britain will need several years to sell stakes in two of its biggest banks, the body managing the holdings said, refusing to set a precise timescale on an exit that could cost taxpayers billions of pounds.

The government will offload the shares in Royal Bank of Scotland (RBS.L) and Lloyds Banking Group (LLOY.L) through a protracted series of sales into markets, UK Financial Investments (UKFI) said in its first annual report.

"UKFI does not set any fixed timetable for disposing of the shares, but says it expects to undertake a number of capital markets transactions over a sustained period," the body said in an accompanying statement on Monday.

The British government set up UKFI, which employs just 11 people and is run from the Treasury, in December to manage the stakes the state picked up after a 37 billion pound ($59.57 billion) bank bailout.

The unrealised loss on the stakes now stands at 10.9 billion pounds, UKFI said, signalling the bail-out to save Britain's financial sector from collapse could become a costly legacy passed on to future political rulers.

The country's unpopular Labour government faces a general election within a year, and one of the central issues will be how to lower a budget deficit that will exceed 12 percent of gross domestic product this year.

The UKFI got off to a rocky start with politicians in March, when lawmakers said it was "scandalous" that its Chief Executive John Kingman had failed to provide details of executive pay at the two banks.

ROCKY START

At a crowded news conference in the shadows of London's Houses of Parliament, Kingman -- a former Treasury official who now works with a handful of former investment bankers -- said the disposals "would inevitably take several years".