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* Barclays to outline capital plans with results on Tuesday
* Barclays needs about 7 bln pounds to meet leverage target
* Lloyds' share sale seen most likely in Sept/Oct
* UK banks expected to set aside more money for mis-selling
By Steve Slater and Matt Scuffham
LONDON, July 28 (Reuters) - Barclays will this weeksay how it plans to meet tougher UK rules on capital, whilestrong earnings from Lloyds Banking Group will pave theway for Britain to sell some of its shares in the bank.
Barclays, which publishes results on Tuesday, is expected toset out plans either to sell bonds that are wiped out if it hitstrouble or to raise equity to meet the UK rules.
Barclays' advisers have sounded out investors about apossible 4 billion pound ($6.15 billion) rights issue, theSunday Times reported.
Sources familiar with the matter said last week that was anoption, but not the preferred one. Chief Executive AntonyJenkins is still in talks with regulators about how to hit thetarget, so plans could change at short notice.
Barclays declined to comment.
The bank needs about seven billion pounds ($10.8 billion) tolift its leverage ratio to a three percent minimum demanded bythe Bank of England from an estimated 2.5 percent, whichincludes future losses from mis-selling and bad loans.
Regulators are focused on banks' leverage ratios - thatmeasure a bank's assets against its equity - to keep risk-taking in check to avoid future taxpayer-funded bailouts.
Barclays has already said it plans to issue more capitalthat could convert into shares or be wiped out if its capitalratios fall below a certain level.
The bank has to make sure any bonds it sells would help itsleverage ratio under the UK rules. To do this, the bonds wouldhave to count towards Tier 1 capital, the key measure of abank's financial strength. Similar bonds Barclays has sold,known as CoCos, have been classed as Tier 2 capital.
Much will depend on how much time the bank is given. Theregulator is expected to give the bank until the end of 2014,but a tighter deadline could force the bank to raise equity.
LLOYDS SALE
Lloyds is forecast to report a doubling of its first-halfprofit, when it reports on Thursday, illustrating the turnaroundat the bank since its 20.5 billion pound ($31.5 billion) bailoutby the government in the 2008 financial crisis.
Banking industry sources had said the results could providea window of opportunity for UK Financial Investments, whichmanages the government's 39 percent stake in Lloyds, to initiatean immediate first sale of up to a quarter of the shares, valuedat around 5 billion pounds.
But sources with knowledge of government thinking said afirst sale, comprising a placing to institutions such as pensionfunds and insurers, was more likely to take place in Septemberor October with a sale this week seen as a "long shot."
The August holiday season is traditionally a quiet periodfor share placings and if a sale does not happen immediatelyafter or alongside the results, the government would most likelyhave to wait until September at the earliest.
Lloyds, the Treasury and UKFI declined to comment.
MIS-SELLING
Barclays and other UK banks are also expected to set asidehundreds of millions of pounds more for mis-selling of financialproducts, including payment protection insurance, an industrysource familiar with the matter said.
UK banks have already set aside more than 14 billion poundsfor PPI compensation, but they did not add to that in the firstquarter, suggesting payouts had peaked.
Barclays has set aside 2.6 billion pounds for PPI costs and850 million for interest rate hedging compensation, and both ofthose could rise.
Lloyds has set aside 6.8 billion pounds for PPI, far morethan rivals, and could this week set aside another 250 millionpounds, Investec analyst Ian Gordon estimated.
Barclays could set aside 600-800 million pounds more forPPI, the Sunday Telegraph reported.
Barclays is expected to make a profit of about 3.7 billionpounds for the first six months of the year, up from 759 milliona year ago, according to the average of 22 analysts polled bythe bank.
Lloyds will report an underlying pretax profit of about 2.2billion pounds, up from 1.1 billion the year before, accordingto a Reuters poll of six analysts. It is expected to reportprogress in reducing costs and an improved capital position.
