* OFT approves plans for Lloyds, RBS branch sales
* OFT forces Lloyds to strengthen TSB prior to sale
* Decision removes barrier to Lloyds share sale - sources
By Matt Scuffham
LONDON, Sept 11 (Reuters) - Britain's competition regulatorhas approved plans by Lloyds Banking Group to sell 631branches, potentially clearing the way for the government tostart selling its shares in the bank this week.
Lloyds must sell the branches, which it has re-branded underthe TSB banner, as a penalty for receiving a 20.5 billion pound($32.4 billion) bailout during the 2008 financial crisis, whichleft Britain holding a 39 percent stake.
Britain's Office of Fair Trading (OFT) said on Wednesday itwas happy with Lloyds' plans, provided it strengthens TSB'sbalance sheet prior to a sale of the business next year. Lloydssaid it would make changes to enhance TSB's profitability byover 200 million pounds ($316.27 million) in aggregate in itsfirst four years.
The OFT's backing for the plans will remove uncertainty andhelp clear the way for the government to start selling itsshares in the bank, sources with knowledge of governmentthinking said on Wednesday.
Shares in Lloyds hit a 3-year high on Tuesday asexpectations mounted the British government could start sellingits shares this month.
Sources have said it is considering selling around a quarterof its 39 percent stake - worth about 5 billion pounds.
The OFT also said on Wednesday that plans by RBS to sell 315branches would result in a credible lender to small businesseswith sales of between 1 million and 25 million pounds. The OFTexpects it will have the ability to compete and grow over timeand has not recommended any changes to the plan.