*
LONDON, March 26 (Reuters) - The former chairman ofBritain's Co-operative Bank, which nearly collapsed last year,said finance minister George Osborne had pressured it to buyhundreds of branches from the partially state-owned Lloyds.
Lloyds had been forced to sell the 632 branches by Europeanregulators as part of its taxpayer rescue in 2008, at the heightof the financial crisis, but its choice to sell to the Co-opattracted huge criticism, sparking allegations at the time thatpoliticians had encouraged that choice.
The sale to the Co-op Bank had been considered a way toincrease competition and boost a smaller Britain lender whichwas fully controlled by the mutually-owned Co-operative Groupuntil late 2013.
However, the sale collapsed last April when Co-op Bank wasfound to have a 1.5 billion pound ($2.5 billion) capitalshortfall that forced a full restructuring and a rescue by itsbondholders.
Former chairman Paul Flowers, who was arrested last year onsuspicion of supply of illegal drugs, said Osborne'sConservative Party had been determined to push the sale throughso the proceeds could benefit the public finances.
"(There was) considerable (pressure) from the presentgovernment, mainly from Conservatives," Flowers said in aninterview broadcast on BBC television late on Tuesday.
"They actually said that they were keen on this Co-op becoming a much more significant player with more scale.
"There was pressure certainly from (junior minister) MarkHoban, but I believe, and know, that that originated much higherup, with the chancellor himself."
COMMERCIAL MATTER
The Treasury said the deal had been a commercial matter.
"The selection of the Co-op and the decision on whether toproceed with the ... deal was a purely commercial matter forLloyds Bank and the Co-op Bank, as the chairman and chiefexecutive of Lloyds have consistently made clear," it said in astatement, noting the Co-op withdrew from the transaction.
It added: "Since the full extent of the situation at Co-opBank became clear, the chancellor has ordered an independentinvestigation into the events at the Co-op Bank and thecircumstances surrounding them."
Hoban did not immediately reply to requests for comment leftwith his office in the House of Commons and his constituency.
Lloyds has previously rejected the suggestion that ministersinterfered in the sale.
As the state of the Co-op Bank's woes became clear, theCo-operative Group bowed to bondholder pressure in October andnow owns only 30 percent of the bank with the remainder held byprivate investors.
Flowers, a one-time local Labour politician and Methodistpreacher with no banking qualifications, quit his post as deputychairman of Co-op Group in June at the same time as he quit thebank.
He said it was not his job to defend his appointment aschairman of the bank in 2010.
"Others made a judgment that I was the right and appropriateperson to be the chair at that particular time," he added.
Flowers was arrested last November after a newspaperreported he had been filmed arranging to buy drugs.
In his first interview since the allegations were made,Flowers declined to comment on the story and said police werestill looking into some issues, but he did say some of what wasreported at the time was untrue. (Reporting by Costas Pitas, Andy Bruce and Kate Holton; Editingby Alison Williams)
Lloyds (LLOY)