UPDATE 2-Bank of England takes steps as Brexit risks appear, pound falls

* BoE gives banks more room to lend

* More time for insurers to adjust to EU rules

* Sterling renews fall after fund closures

* Banks says strong on capital, liquidity - Osborne (Adds suspension of M&G real estate fund, updates marketprices)

By David Milliken and Huw Jones

LONDON, July 5 (Reuters) - The Bank of England took steps onTuesday to ensure British banks keep lending as the financialconsequences of the country's decision to leave the EuropeanUnion began to materialise, especially in commercial realestate.

Sterling hit a fresh 31-year low against the dollar afterthree big investment firms halted trading in real estate funds,reflecting fears of a Brexit hit to the property market.

There were other signs of how the fallout from thereferendum was hitting the economy. Business confidence plungedafter the vote, a survey showed, and retailer John Lewis saidits sales grew more slowly last week.

The BoE, which is trying to cushion the economy from theJune 23 referendum result, said it would lower the amount ofcapital banks must hold in reserve, freeing up an extra 150billion pounds ($196 billion) for lending.

Governor Mark Carney recalled the central bank's warnings inMarch that the referendum was the biggest near-term domesticrisk to financial stability. "Some of those risks have begun tocrystallise," he said.

Separately, finance minister George Osborne met the heads oftop banks and they issued a joint statement afterwards to saythe lenders would free up more capital for lending.

The BoE's move represented a reversal of a decision it tookearlier this year, when it started tightening the screws onlenders because the economy had appeared set for more growth.

"It means that three quarters of UK banks, accounting for 90percent of the stock of UK lending, will immediately havegreater flexibility to supply credit to UK households andfirms," Carney said.

It remains to be seen if consumers and businesses will wantto borrow while Britain's economic prospects remain uncertain.

Prime Minister David Cameron has said he will resign but his successor is not expected to take office until September,deepening the uncertainty. Cameron has left it up to the nextgovernment to decide how Britain might rework its ties with theEU, something which could take years to negotiate.

Sterling resumed its fall, sinking as much as 1.7 percent toits lowest level against the dollar since September 1985. It wasdown 1.4 percent against the euro. Yields on 10, 20 and 30-yearBritish government bonds hit new record lows as investors aroundthe world sought the safety of sovereign debt.

PROPERTY WORRIES

The pound slid after the fund arm of insurer Aviva suspended its 1.8 billion-pound UK Property Trust, following asimilar move on Monday by Standard Life. Later M&G, thefund management arm of insurer Prudential alsotemporarily closed its fund.

The BoE said foreign flows of capital into commercial realestate dropped 50 percent in the first three months of 2016 andtransactions fell further in the second quarter, an extremeexample of concern among investors about the referendum.

Although the closure of the funds brought back memories ofthe aftermath of the financial crisis in 2008-2009, EduardoGorab, a property economist at consultancy Capital Economics,said the limits on outflows could help prevent a collapse invalues.

On the stock market, housebuilding firms were tradingsharply lower, with shares in Berkeley Group, BarrattDevelopment, Taylor Wimpey and Persimmon all down more than 6 percent.

The BoE said it was closely monitoring investors'willingness to fund Britain's large current account deficit, high levels of household debt and the subdued global economy.

"The current outlook for UK financial stability ischallenging," it said.

But there were also signs of calm. A BoE auction to providebanks with liquidity and a sale of British government bonds wentsmoothly. The fall in sterling could encourage foreign investorsto buy gilts, a senior official at the UK Debt Management Officetold Reuters.

Carney said the fall in sterling should help to ease thebalance of payments shortfall although the pace of investmentwould also be important.

More responsibility has fallen on Carney and the BoE tosteer Britain through its political crisis because ofuncertainty over Osborne's future as finance minister.

Carney said last week that he believed the BoE would easemonetary policy soon. A Reuters poll showed economists mostlyexpect the Bank will not cut interest rates when it meets nextweek and wait until August instead.

"These measures are really about Carney aligning the Bank ofEngland's guns in case the UK economy enters a downturn,"Aberdeen Asset Management Investment Manager James Athey said.

Also on Tuesday, the BoE gave insurers more time to adjustto new EU capital rules to avoid pressure on them to dumpcorporate bonds. The central bank said it would keep a close eyeon the buy-to-let mortgage sector, in case landlords sell asproperty prices fall, and on the rising numbers of indebtedhouseholds. ($1 = 0.7651 pounds) (Writing by William Schomberg and David Millken; additionalreporting by Andy Bruce, Jemima Kelly, James Davey, DharaRanasinghe and Carolyn Cohn; editing by Anna Willard and DavidStamp)