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* Bank needs dividend go-ahead for sale to happen -sources
* Lloyds is in talks with regulator over paying dividend
* Outcome of dividend talks remains uncertain -sources
* Shares need to be trading above 80 pence for sale -sources
By Matt Scuffham
LONDON, Oct 9 (Reuters) - Britain is unlikely to sell anymore of its remaining 25 percent stake in Lloyds Banking Group until the bailed-out lender is cleared to pay dividendsagain, banking and political sources told Reuters.
Without regulatory approval to pay dividends, Lloyds sharesare not expected to rise to a level that would enable UKFinancial Investments (UKFI), which manages the government'sstakes in bailed-out banks, to convince Britain's financeministry that a sale would be in taxpayers' best interests.
In contrast, the chances of a first sale of part of thegovernment's 79 percent stake in the other big British bankpartly nationalised during the 2007-2009 financial crisis, RoyalBank of Scotland, have risen this year. A sale of someRBS shares is now seen as a possibility within the next twoyears, the sources said.
Britain raised 7.4 billion pounds ($12 billion) through twoseparate sales of Lloyds shares to pension funds and insurers inSeptember 2013 and March 2014. These were priced at 75 pence and75.5 pence per share, above the 73.6 pence which the governmentpaid when it pumped 20.5 billion pounds into Lloyds to preventit from failing during the crisis.
The government would not want to sell shares at a pricebelow that achieved in the first two sales, according to bankingand political sources. The first two were priced at discounts of3 percent and 4.6 percent to the market price and a similardiscount would also be expected on the next sale.
That means shares in Lloyds, up 0.3 percent to 75.5 pence at1320 GMT on Thursday, would need to be trading at around 80pence or above. And that is unlikely without the lure of adividend, the sources said.
"What gets you there is the dividend. It's hard to see atthe moment how else you get sufficient momentum," one sourceinvolved in the sale process told Reuters.
Government hopes of returning Lloyds to full privateownership before the next election in May 2015, seen as amilestone in Britain's economic recovery, were dashed by a fallin its shares.
However, a sale of around a quarter of the government'sremaining shares would still be possible ahead of the vote ifLloyds gets permission from the Prudential Regulation Authorityto pay a "modest" dividend for the first time since its bailout.
Lloyds shares are considered fully valued by many investorsuntil it can pay a dividend. It trades at 1.3 times its bookvalue, compared with HSBC at 1 times book value, RBS at0.8 times and Barclays at 0.7.
Lloyds is expected to be trading at 86.7 pence in twelvemonths time, according to 23 analysts polled by Thomson Reuters.On average they forecast a 2014 dividend of 1.23 pence.
Lloyds shares were one of the best performing stocks in theFTSE-100 index in 2012 and 2013 but have fallen by 12 percentsince January - leading Britain's Finance Ministry to abandon aplanned sale to retail investors in September.
Lloyds must convince the PRA it is sufficiently capitalisedto withstand future market shocks and able to pass stress testsby European and UK regulators, with results due later this year.
If Lloyds got the green light from the PRA this month itcould in theory announce its dividend plans alongside itsthird-quarter results and strategy review on Oct. 28.
If it missed this window, a further sale would have to waituntil after the bank's 2014 results on Feb. 27, by whenuncertainty over the impending election could be an obstacle.
Britain's Labour party, which narrowly trails the rulingConservatives in recent polls, plans to force the UK's biggestbanks to sell hundreds of branches if it gains power. AsBritain's biggest high street lender, Lloyds is in its sights.
RBS PROSPECTS ENHANCED
Meanwhile, the prospects of the government selling shares inRBS have improved with the bank on track to make a pretax profitof 4.8 billion pounds this year, according to a Thomson Reuterspoll of 19 analysts, compared with an 8.2 billion pound losslast year, after recovering debts it had previously written off.
Unlike in the case of Lloyds, shares in RBS are still wellbelow the price the government paid for them in a 45.2 billionpound bailout in 2008, and none have been sold so far. Butindustry and political sources say a first sale of thegovernment's shares could happen in the next two years. Previousexpectations put the first sales off by 3 to 5 years.
A source involved in the sale process said progress thisyear had taken RBS closer to the point at which the government'sshares could start being sold, but cautioned this was unlikelyuntil it had more clarity on conduct and litigation issues.
RBS is one of six banks in talks with the Financial ConductAuthority to settle allegations its staff were involved in therigging of the global $5 trillion-a-day currency market. It isalso being investigated by regulators looking into its treatmentof struggling small British firms and its selling of bondsbacked by residential mortgages in the United States.
Chief Executive Ross McEwan said last month that he expectsthe bank to be able to put the fallout from past misconductbehind it over the next 18 months.
(1 US dollar = 0.6257 British pound) (Reporting by Matt Scuffham; Editing by Alexander Smith andPeter Graff)
