UPDATE 1-Britain's finance industry scales back EU market access demands

* UK finance industry prepared to settle for limited EUtrade deal

* Sees scope for mutual access to UK and EU markets

* Reality dawns that full passporting rights likely to go (Adds Hodson quotes, second report)

By Andrew MacAskill and Huw Jones

LONDON, Jan 12 (Reuters) - Britain's finance industry hasreluctantly given up on efforts to keep full access to theEuropean Union after Brexit and is pushing instead for a morelimited trade deal that would potentially exclude some financialproducts.

Banks, insurers and asset managers have concluded there isno realistic chance of maintaining full passporting rights afterBrexit that would allow them to sell all their services acrossthe 28-nation bloc from Britain.

TheCityUK, the country's most powerful financial lobbygroup, instead called on Thursday for limited market access forsome finance sectors based on a pact in which Britain and the EUwould accept each other's rules.

Such an "equivalence" arrangement would keep the door openfor cross-border trading of stocks and bonds, and sales ofcertain other products.

TheCityUK document is the first attempt to condense theindustry's priorities after months of conflicting lobbying andcomes just two months before Britain plans EU divorce talks.

"I am confident that this represents in broad shape the keypriorities for the industry," TheCityUK Chief Executive OfficerMiles Celic told Reuters.

"There are a multiple number of documents out there of stuffat significant length. So there was a sense among our membershipto filter down what the key asks were into a single place."

The future of London as Europe's financial centre is one ofthe biggest issues in Brexit talks because it is Britain'slargest export sector and biggest source of corporate taxrevenue.

DOSE OF REALITY

By pushing for an equivalence deal there is a risk that somefinancial sectors may be excluded from any final settlement.There is currently no equivalence regime for commercial bankingor some forms of insurance.

Separately on Thursday, the Financial Services NegotiationForum of pro and anti-Brexit financiers also said that Britainshould seek a "bespoke" form of equivalence to maintain marketaccess.

The current equivalence regime is not a "silver bullet" solution that can replace passporting in its entirety, it saidin a report with law firm Norton Rose Fulbright.

Daniel Hodson, chairman of the forum's executive committee,said the financial sector was now coalescing around equivalenceafter having had time to consider how it could work.

"There is considerably increased realism now that peoplehave begun to really focus on the issues and get their mindround them," Hodson said.

Until now, finance organisations have clashed over whoshould be leading efforts to lobby the government and what theirBrexit response should be.

After the June vote, business leaders begged for Britain tostay inside the single market, for example, by having aNorway-style deal that would provide full access to Europe'smarkets.

But EU leaders have repeatedly warned that single marketaccess is defined by the bloc's four freedoms - free movement ofgoods, capital, services and people - and that they cannot beunpicked.

TheCityUK proposals call for "clear and upfront transitionalarrangements" to bridge the gap between leaving the EU and thestart of a bespoke deal, though they do not specify a timeframe. ($1 = 0.8248 pounds) (Editing by Jane Merriman/Keith Weir)