UPDATE 1-UK talking to six banks about settling FX probe-sources

* Group settlement may be unveiled this year-sources

* Banks face fines of hundreds of millions of poundseach-source

* United States authorities not involved in UK talks-sources

By Jamie McGeever and Steve Slater

LONDON, Sept 26 (Reuters) - Britain's financial regulatorhas intensified talks with six major banks over allegations ofcollusion and manipulation in the foreign exchange market,setting the stage for a group settlement that could cost themclose to 2 billion pounds($3.26 billion).

Britain's Financial Conduct Authority (FCA) and the lendersare keen to draw a line under a scandal that has cast London,the world's foreign exchange trading hub, in a negative light,ensnared the Bank of England and weighed on banks' share prices.

The FCA met officials from UBS, Barclays,HSBC, Royal Bank of Scotland, JP Morgan and Citi this week and discussed the possibility of agroup settlement that would see the banks fined differentamounts depending on the gravity of the alleged misconduct,sources said.

The aggregate fine could come in at around 1.8 billionpounds with the maximum fine for one bank put forward of between300 million and 400 million pounds and others pegged below 300million, one source familiar with the matter said.

These figures, which are far larger than any individual finepreviously levied by the FCA, include a 30 percent discount forearly settlement, the source added.

Sky News, which first reported this week's meetings, said adeal could cost lenders around 2 billion pounds and could beannounced as soon as November.

Earlier this month, Reuters reported that banks were pushingfor a coordinated settlement with the FCA, which was on track tobe reached by the end of the year.

Two sources said on Friday that the "next step" in the FXtalks could be in November, which is also when G20 leaders willsign off on proposals from global regulators to reform andstrengthen the $5.3 trillion-a-day currency market.

The FCA and the banks declined to comment. The UK Treasuryand Bank of England also declined to comment.

The FCA launched a probe last October into allegations thatbank traders used advance knowledge of client orders to try andmanipulate foreign exchange benchmarks.

In recent months, the investigation has focused on laxinternal compliance, oversight failures and market conductbreaches by individual employees rather than deliberatemanipulation of the market, sources have told Reuters.

The Bank of England (BoE) appointed a barrister in March ofthis year to examine whether any of its officials were involvedin the alleged rigging.

One BoE employee was suspended earlier this year, pending aninvestigation into failings in the Bank's "rigorous internalcontrol processes".

More than 30 traders from various banks have been put onleave, suspended, or fired. No individual or bank has beenformally accused of any wrongdoing.

UK FLYING SOLO

The FCA talks do not include the United States, whereseveral authorities, including the Department of Justice, arealso conducting their own investigations.

A global settlement is not expected, sources in London andWashington said, meaning that the U.S. investigations are likelyto roll into 2015.

A spokesman for the Department of Justice in the UnitedStates declined to comment.

Earlier this week, Bank of England Deputy Governor AndrewBailey said that better coordination between U.S. regulators andelsewhere was needed when levying fines on banks for misconductto avoid making it harder to rebuild strength in the bankingsystem.

"I am trying to build capital in firms and it's draining outthe other side (in fines and penalties)," Bailey said.

In their investigations into rigging of the London interbankoffered rate or Libor, the FCA and U.S. authorities coordinatedsettlements on a case-by-case basis with the banks.

The FCA's biggest sanctions for benchmark manipulation isthe 160 million pound fine levied against UBS inDecember 2012 for its role in Libor, followed by the 105 millionpounds levied at Rabobank in October 2013, also for Libor.

Banking executives have been pushing for a coordinatedsettlement, keen to avoid any of them being singled out forparticular acrimony and a repeat of the ongoing Libor probe,where fines and penalties drip out.

Barclays was the first bank to come clean on the Liborrigging scandal in the summer of 2012, making it the focal pointfor public and political anger and forcing the resignation ofits then chief executive Bob Diamond. (Additional reporting by William Schomberg and David Milliken.Editing by Carmel Crimmins)