UPDATE 2-UK watchdog says Lloyds must raise $13.5 bln capital

* Regulator sees 27.1 bln stg capital shortfall at 5 banks

* Introduces leverage ratio ahead of global deadline

* RBS, Lloyds say no need to issue new shares, debt

* Barclays, Nationwide asked to cut leverage

By Huw Jones and Matt Scuffham

LONDON, June 20 (Reuters) - Lloyds Banking Group must plug a capital shortfall of 8.6 billion pounds ($13.5billion), Britain's banking regulator said on Thursday, a dayafter the government signalled plans to return the part-stateowned lender to the private sector.

Britain is trying to restore confidence in a banking sectorthat had to be shored up by taxpayers during the 2007-09financial crisis. Apart from the large minority stake in Lloyds,it also owns 81 percent of Royal Bank of Scotland.

The Prudential Regulation Authority (PRA) said the aggregatecapital shortfall at five UK banks at the end of 2012 was 27.1billion pounds, slightly higher than its 25 billion initialestimate in March this year.

The banks had already outlined plans in March to raise 12.5billion pounds during this year - roughly half the totalshortfall - and the PRA raised this estimate to 13.7 billion onThursday.

The aim is for banks to have a core capital bufferequivalent to 7 percent of their risk-weighted assets byDecember, the minimum level under new global Basel III capitalrules now being phased in.

In a new move, the PRA also set a leverage ratio of 3percent for UK banks with immediate effect, which effectivelylimits the amount they can lend based on their capital. This isfive years earlier than a globally agreed deadline.

RBS, which the government has said will take longer toreturn to full private ownership, had a total capital shortfallof 13.6 billion pounds at the end of December, Lloyds 8.6billion and Barclays 3 billion, the PRA said.

The PRA said Barclays' leverage ratio fell short of its newrequirement at 2.9 percent, and would be only 2.5 percent afteradjustments. It said Barclays and Nationwide must submit plansby the end of this month to reduce leverage.

Barclays said its restructuring plans include a reduction inleverage "over time" and it would keep the market updated asrequired.

Lloyds has already announced plans to raise 5.8 billionpounds in capital and on Thursday said it expects to meet theremaining 2.8 billion requirement through capital generation andwon't need to issue hybrid debt or shares.

ON THE BLOCK

Finance Minister George Osborne said on Wednesday thatBritain was ready to start selling shares in Lloyds and wouldconsider breaking up RBS.

Barclays said it can fill its 3 billion pound gap fromearnings and other restructuring measures and does not plan toissue new shares. RBS said in a statement it expects to continueto improve its core capital ratio during this year.

The PRA said the Co-op had a shortfall of 1.5 billion poundsand Nationwide 400 million pounds. There were no shortfalls atHSBC, Standard Chartered or Santander UK, the watchdog, part of the Bank of England, said.

"A number of these intended actions will require regulatoryapproval before being implemented. As such, they cannot beassumed to have contributed to meeting the requirement untilapproval is given," the PRA said.

"In the event that they are either not carried out or failto be approved, other actions will be required of those firms inorder to reach the specified standard."

The PRA said it has given some flexibility by allowing somebanks to complete actions during the first half of 2014.

After the actions planned so far, four banks will still havea shortfall and they have been required to submit plans foradditional actions.