UPDATE 2-Lloyds to launch partial sale of TSB next week

(Adds comments from sources, background)

* Lloyds had first mooted a sale of up to 50 pct

* Lloyds must sell TSB by end of 2015

* Sale expected to be in 3 tranches - sources

* JP Morgan, Citi leading IPO

By Matt Scuffham and Freya Berry

LONDON, May 22 (Reuters) - Lloyds Banking Group will next week launch the sale of about 25 percent of its TSBbusiness via a stock market flotation with the pricing expectedto be below book value, banking industry sources told Reuters.

The amount sold is likely to be at the bottom end of earlierguidance, they said, reflecting a cooling of investor interestin UK company flotations in recent weeks following a flurry ofactivity earlier in 2014.

TSB's Chief Executive Paul Pester said in November Lloydscould initially sell between 30 and 50 percent of the business,which has 631 branches and 4.5 million customers, making itBritain's seventh-biggest lender. However, Lloyds FinanceDirector George Culmer said in May the bank would sell a minimumof 25 percent.

Banking industry sources said the IPO, which will take placebefore the end of June, is expected to value TSB below its bookvalue of 1.5 billion pounds, meaning Lloyds will make a loss onthe sale.

"They're being a bit more realistic on valuation. There'sjust not appetite in the market," one of the sources said."There's just a rash of consumer-exposed IPOs, and TSB is veryconsumer-focused."

Clothing chain Fat Face pulled its planned London listing onThursday, citing market conditions as the main factor in itsdecision. Holidays-to-insurance firm Saga priced its IPO at thebottom of its original range.

"TSB a month ago would have been the hottest deal around,"one banker told Reuters.

Lloyds must sell all of TSB by the end of 2015 as acondition of its 20.5 billion pound state bailout during the2008 financial crisis. It is expected to sell it in three stagesand needs to sell the first tranche by the end of the secondquarter to be on track to meet the deadline, the sources said.

JP Morgan and Citigroup are leading the IPOprocess. UBS is joint bookrunner.

Lloyds wants to sell in June because it may not be able toin the following months. It will enter a close period in therun-up to its results on July 31. August is traditionally adifficult time to conduct share sales because of the holidayseason and a sale in September might be complicated by anindependence vote in Scotland, where Lloyds is registered.

Pester began sounding out potential investors in Britain andthe United States in January, hoping they would be attracted toTSB because it had no legacy issues relating to past misconductand would benefit from Britain's economic recovery.

Lloyds is currently trading at 1.3 times its book valuewhile HSBC is trading at 1.1 times. Barclays and Royal Bank of Scotland are both trading below bookvalue, with the legacy of past misconduct continuing to weigh onthe shares.

Lawmakers and regulators are keen to see new banks emerge tobreak the dominance of Britain's biggest five banks, whichcontrol more than three quarters of the personal current accountmarket and TSB is seen as a viable challenger.

Lloyds had originally planned to sell the branches to theCo-operative Bank but that fell through last year before a 1.5billion pound funding gap at the Co-op was exposed.

Lloyds then reverted to a stock exchange listing for thebranches, which it re-named TSB, reviving a 200-year-old brandlast seen on the British high street in 1995.

The European Commission approved the IPO last month andagreed to extend the original deadline for the sale of November2013. Competition Commissioner Joaquin Almunia said establishingTSB as a standalone bank would increase competition in UK retailbanking.

The government has begun to sell its holding in Lloyds andwants to sell its remaining 25 percent stake before the nextelection in 2015. Lloyds managers see the sale of TSB as helpingit return to being a "normal" bank.

Lloyds and TSB declined to comment. Citi declined tocomment. JP Morgan and UBS were not immediately available forcomment. ($1 = 0.5925 British Pounds) (Editing by Tom Pfeiffer)