* BoE reverses capital buffer decision of March
* Carney says move represents "major change"
* More time for insurers to adjust to EU rules
* Osborne to meet bank CEOs on Tuesday
* Signs of UK economic weakness after Brexit vote (Adds Carney comment, background)
By David Milliken and Huw Jones
LONDON, July 5 (Reuters) - The Bank of England took steps toensure British banks can keep lending and insurers do not dumpcorporate bonds in the "challenging" period that is likely tofollow the country's shock vote to leave the European Union.
The central bank said it would lower the amount of capitalbanks are required to hold in reserve, freeing up an extra 150billion pounds for lending in a reversal of a decision it tookearlier this year, when it started tightening screws on lendersbecause Britain's economy appeared on course for more growth.
BoE Governor Mark Carney said the move represented a "majorchange" that would help the economy to weather the Brexit hit.
"It means that three quarters of UK banks, accounting for 90percent of the stock of UK lending, will immediately havegreater flexibility to supply credit to UK households andfirms," he told reporters.
Sterling dropped more than 10 percent against the dollar andbanks' share prices fell by a fifth after Britons voted on June23 to leave the EU, prompting Prime Minister David Cameron tosay he would step down.
Sterling touched a new, 31-year low against the U.S. dollarearlier on Tuesday, hurt by Standard Life's suspension oftrading in its British real estate fund but recovered some ofits losses after the BoE announcement and Carney's comments.
Twenty and 30-year British government bond yields brieflytouched new record lows.
With uncertainty about the future of George Osborne asfinance minister, more responsibility has fallen on Carney andhis fellow BoE policymakers to steer Britain through its worstpolitical crisis in decades.
Fresh signs of weakness in the economy appeared on Tuesday.
Business confidence fell sharply in the days after the voteto leave the EU, a survey showed, and retailer John Lewis saidits sales grew more slowly last week.
Furthermore, Britain's dominant services industry grew atits slowest pace in three years in June, according to a surveyconducted mostly before the referendum.
The central bank said it was closely monitoring investors'willingness to fund Britain's large current account deficitafter the shock outcome of the vote, as well as high levels ofhousehold debt and the subdued global economy.
Carney said the fall in sterling should help ease thebalance of payments shortfall but the pace of investment wouldalso be important.
The central bank said risks it had identified before thereferendum were starting to materialise, including lower demandfor commercial property.
BREXIT RISKS
The announcement by the BoE on bank capital, after twomeetings of its Financial Policy Committee since the referendum,followed an unusually explicit comment by Carney last week thathe believed the BoE would ease monetary policy soon too.
"These measures are really about Carney aligning the Bank ofEngland's guns in case the UK economy enters a downturn,"Aberdeen Asset Management Investment Manager James Athey said.
"He's not waiting for anything bad to happen but ratheracting in case it does."
The BoE said risks it had identified before the vote werematerialising, including lower demand for commercial property.
As part of its announcement on Tuesday, the BoE reversed adecision it took in March to increase the amount of capitalbanks must hold against cyclical upturns in the credit cycle.
Holding the so-called counter-cyclical capital buffer (CCB)at zero until at least June 2017 would reduce banks' capitalrequirements by 5.7 billion pounds, potentially freeing up anextra 150 billion pounds for lending, the BoE said.
The BoE also gave insurers more time to adjust to new EUcapital rules to avoid pressuring them to dump corporate bondsand avoid high capital charges as interest rates plunge.
Before the referendum, consumer borrowing was rising at itsfastest rate in a decade while mortgage lending had easedslightly as higher taxes on landlords and second-home buyerstook effect in April.
The BoE said it would keep a close eye on the buy-to-letmortgage sector, in case landlords sell up as property pricesfall, as well as on the rising numbers of vulnerable indebtedhouseholds.
It expressed concern about a fall in investor demand forBritish assets - which could make it harder for the country tofinance its large current account deficit - as well as troublein commercial real estate making it harder for businesses to usetheir property as collateral to obtain loans. (Writing by David Millken and William Schomberg; additionalreporting by Andy Bruce, Jemima Kelly and James Davey; editingby Michael Holden and Anna Willard)
