UPDATE 1-Flagship UK scheme boosts bank lending, aiding recovery

* Net lending +5.8 bln stg in Q3 vs +1.6 bln in Q2

* Biggest net lending increase since scheme was launched

LONDON, Dec 2 (Reuters) - Britain's flagship scheme toencourage banks to pump more credit into the economy achievedthe highest quarterly net lending since its introduction lastyear, giving further evidence of a pick-up in the economy.

The Bank of England said on Monday net lending by banks was5.8 billion pounds ($9.5 billion) during the third quarter, morethan three times the 1.6 billion seen in the quarter before.

Banks have so far drawn down 23.1 billion pounds from thefunding for lending scheme (FLS) and net lending has risen by3.6 billion overall since its launch in July last year.

"An economic recovery has taken hold. These data show that asignificant improvement in credit conditions, aided by the FLS,is now feeding through to lending," said Paul Fisher, executivedirector for markets at the bank.

Fisher added that lending to small businesses remainedsubdued, however. The government said last week it would tweakthe scheme, no longer providing funds for mortgage lending - amove it hopes will avoid a housing bubble in the UK andstimulate small business lending.

The government launched FLS as part of its efforts to liftthe economy out of recession. The central bank made cheap fundsavailable to banks and building societies on the condition theylent to UK households and businesses.

The data showed the biggest net lenders in the quarter wereLloyds Banking Group and Nationwide, who increasedlending by 3.1 billion pounds and 2.7 billion respectively.

Net lending fell at Santander UK, Barclays and the Co-operative Bank.

Santander UK once again showed the biggest drop in netlending, which declined by 2.1 billion pounds in the thirdquarter.