UPDATE 1-Citigroup to exit UAE interbank rate setting panel

* Citi to leave Eibor on June 25

* Panel reduced to 11 banks from 12

* Bank declines to comment on reason

* Follows Barclays departure and Libor scandal

* Two-month Eibor to be abolished

By Stanley Carvalho

ABU DHABI, June 10 (Reuters) - U.S. lender Citigroup will leave the interbank interest rate setting panel in theUnited Arab Emirates on June 25, reducing the size of the panelto 11 banks from 12, the central bank said on Monday.

The move will further increase the dominance of local banksover foreign banks in the panel that determines the Emiratesinterbank offered rate (Eibor), which is used to pricefinancial instruments in the Gulf's top banking centre.

A spokesman for Citi declined to comment on the reasons forits withdrawal when contacted by Reuters. The central bank saidthe exit was in line with Citi's "globally implemented policy".

Since last year's scandal over manipulation of the Londoninterbank offered rate (Libor), banks around the world have beenconsidering withdrawing from panels which set indicativeinterbank rates, questioning the benefits of participation giventhe potential risks to their reputation.

Last year Barclays agreed to pay a $453 millionfine to U.S and British regulators over Libor manipulation, andlast October it withdrew from the Eibor panel, though there wasno suggestion that it tried to manipulate Eibor.

Barclays was replaced by UAE lender National Bank ofFujairah, but Citi will not be replaced. That willleave nine local and two foreign banks - HSBC andStandard Chartered - in the panel.

The central bank also said on Monday that the two-monthEibor tenor would be dropped from the panel's fixings, effectiveon Dec. 10. Eibor rates run from one week to one year.

A banker familiar with Eibor, who declined to be named, saidthe two-month tenor was being dropped because it was rarelyused. Citi's exit from the panel is unlikely to affect ratessignificantly, he said.

The central bank said the next meeting of the Eibor panelwould discuss governance standards in line with recommendationsby the Bank for International Settlements.