UPDATE 2-Lansdowne has 1.1 bln stg Lloyds stake -source

* Source says stake is a bet on UK banking sector

* Equates to 2.5 pct based on latest data

* Lloyds shares close at 67.2 pence, up 2.75 percent

(Adds details of UK government stake, comment from second source, share price)

By Joel Dimmock

LONDON, April 20 (Reuters) - UK hedge fund firm, Lansdowne Partners, has built up a 1.1 billion pound ($1.77 billion) stake in Lloyds as part of a bet on UK banks, said a source familiar with the situation, making it the top holder bar the UK state.

According to the latest available Thomson Reuters data, this equates to a 2.5 percent stake in Lloyds Banking Group LLOY.L, which puts Lansdowne ahead of Legal & General's fund arm, which has a disclosed 2.25 percent stake.

The UK government has more than 40 percent through its UK Financial Investments (UKFI) vehicle.

The Lansdowne holding is part of a wider long bet on the UK banking sector, the source said, but would not disclose other holdings.

The hedge fund firm had announced on Monday that it had a small short position in Prudential PRU.L. The source said the Pru short should be seen as a "slight hedge" against the long position on UK banks.

A second source, with knowledge of Lansdowne’s investments, said the Lloyds stake was “a big position for us”.

“We just think it should trade at higher than book value,” the source said.

One of the UK’s largest hedge fund firms, Lansdowne had close to $12 billion in assets under management as of end-June 2009. One of the more secretive hedge fund firms, it was one of the winners during the credit crisis as it bet that some financial firms’ shares would fall.

Lansdowne would not comment on the size of its holding in Lloyds, while the bank was unable to comment on the stake as it is below the 3 percent threshold above which disclosure is mandatory.

UKFI also declined to comment.

Lloyds shares closed at 67.2 pence, up 2.75 percent, and above the average price paid by the UK government, net of fees already received from Lloyds -- making it more likely that the government might start to consider reducing its stake.

Lansdowne's bet on Lloyds echoes that of GLG Partners GLG.N fund manager John White, who late last month made a valuation call to switch out of Barclays BARC.L into Lloyds. [ID:nLDE62G24M]

Lansdowne founders Paul Ruddock and Steven Heinz were ranked joint 218 in last year’s Sunday Times Rich List with a fortune of 260 million pounds each.

Ruddock and fund manager David Craigen are both listed as big donors to the UK opposition Conservative party, although the firm recently hired former Labour party Prime Minister Tony Blair to give a series of speeches. [ID:nLDE60O1HD] ($1=.6233 POUND) (Additional reporting by Laurence Fletcher and Clara Ferreira-Marques, editing by Will Waterman and Sharon Lindores) (For the Funds Hub blog: (For Global Investing: here) (; +44 (0) 20 7542 3505; Reuters Messaging


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