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(Adds details, insurance industry letter, FCA)
LONDON, April 1 (Reuters) - British finance minister GeorgeOsborne said on Tuesday he was "profoundly concerned" about theway the financial watchdog revealed news of a review of theinsurance sector which caused the share prices of insurancefirms to tumble last week.
Osborne said the episode was damaging to both the FinancialConduct Authority (FCA) - which was launched exactly a year ago- and to Britain's reputation for regulatory stability andcompetence.
In a letter to the FCA chairman, he said the regulator'sinquiry into the leak had to be "completely independent" of itstop management and that it should look at what disciplinaryaction should be taken.
"The starting point must be that the FCA holds itself to atleast as high standards as it would expect of a listed companyhandling highly market-sensitive information," Osborne said inthe letter which was published on the Treasury's website.
"I expect you and the FCA board to do everything possible tomake good that damage," Osborne said.
The events unfolded after The Daily Telegraph published aninterview on Friday with a senior FCA official who revealeddetails of a planned review into part of the insurance sector.
The FCA was going to formally announce the review in itsannual report on Monday but shares in insurers fell sharply overfears that profitability would be hit.
The watchdog did not clarify terms of its industry review -which were less wide-ranging than initially expected - untilnearly six hours after the stock market opened.
The FCA said it would take Osborne's letter into account asit finalises the terms of reference for the investigation overcoming days.
In a statement late on Friday the watchdog said its ownboard would conduct an investigation and involve an external lawfirm.
FCA chief executive Martin Wheatley said on Monday thatFriday's events had not been the watchdog's "finest hour".
Osborne said an investigation independent of the FCAexecutive should find out why the announcement of an industryreview was given in advance to a single journalist.
It should also determine why the watchdog did not issue astatement on Thursday evening prior to publication of theinterview, and determine if markets on Friday were disorderly,as insurer Legal & General described them at the time.
The Association of British Insurers has already askedOsborne for a "completely independent" probe, echoing a callfrom Andrew Tyrie, the influential lawmaker who chairsparliament's Treasury Select Committee. (Reporting by William Schomberg and Huw Jones; Editing byPravin Char)
