UPDATE 3-UK banks face break-up threat as watchdog plans competition probe

* Watchdog set to launch full investigation in autumn

* Could force divestments in 2016; Lloyds, RBS most at risk

* Lack of competition in current accounts, business banking

* Big 4 banks have 77 pct of current accounts, 85 pct ofbusiness accounts

* RBS falls 1.7 pct, Lloyds down 0.7 pct (Adds opposition MP, analyst comments, details)

By Steve Slater

LONDON, July 18 (Reuters) - Britain's big banks could bebroken up after the country's new competition watchdog set outplans for an 18-month investigation into services for smallbusiness customers and personal accounts because of a lack ofcompetition.

The Competition and Markets Authority said banks have notdone enough to meet the needs of retail customers or small andmedium-sized businesses, such as making it easier to switchbanks or providing clear information on fees.

The review will mark the latest attempt to open up bankingin Britain to more competition and is also likely keep the banksin the political spotlight ahead of next year's election.

The CMA, which became Britain's new competition watchdog inApril, has the power to order a break up of banks considered toodominant, as well as so-called behavioural remedies, such asimproving information given to customers.

State-backed Lloyds Banking Group and Royal Bank ofScotland, the biggest banks for both personal accountsand business banking, are most at risk of being told to cuttheir market share, potentially by selling more branches.

"Our studies have found that despite some positivedevelopments, significant competition concerns remain which meanthat customers may not be getting consistently good service andvalue from their banks," Alex Chisholm, CMA chief executive,said.

A full investigation had been widely expected. It would takeabout 18 months, so it would be early to mid-2016 before anyremedies were proposed.

Britain's big four banks, which also include Barclays and HSBC, hold 77 percent of the 65 millionpersonal current accounts in Britain, and have 85 percent of the3.5 million business current accounts and provide nine out ofevery 10 business loans, the CMA said.

Current or personal accounts brought in about 8.1 billionpounds ($13.8 billion) of revenue last year for the banks - orabout 125 pounds per customer. Revenue from small businessaccounts was well over 2 billion pounds,the watchdog said.

Shares in RBS fell 1.7 percent by 1100 GMT, the weakeststock in the European bank index. Lloyds shares fell 0.7percent and Barclays and HSBC were both weaker, broadly in linewith the bank sector.

Lloyds and RBS are already being forced to sell more than900 branches between them by European regulators.

Analysts said these two were unlikely to have to shed muchmore of their networks, but they could have to cut into pocketsof strength. That could include business banking in Scotland,where RBS has 39 percent of the market and Lloyds 30 percent.

An investigation may also raise the threat of more politicalinterference ahead of a general election due by May.

"A break up thesis will definitely make its way intopolitical manifestos and news flow is likely to remain volatilefor the banks in this space," Bernstein analyst Chirantan Barua,said.

Ed Balls, shadow finance minister for the opposition LabourParty, wants to impose market share caps on banks and welcomed apossible full industry investigation.

"Ministers claim there is no problem to solve, but everyoneelse recognises that we have a lack of competition in ourbanking sector," Balls said.

UK authorities have been trying to increase competition inbusiness banking services for 15 years, but the CMA saidconcentration among the big banks had not changed much.

It said barriers to entry for newer and smaller banks remainsignificant, there is little movement in the market share of bigbanks, customers see little difference between the services onoffer from the big banks, and there is little transparency tocompare prices such as overdraft fees.

As a result, levels of switching are low. Only 3 percent ofpersonal current account customers switch each year and only 4percent of small businesses change bank, the CMA said.

The Federation of Small Businesses said the investigation ofbusiness banking should force banks to "up their game" and wantsbarriers to entry for new banks to be reduced, including foralternative finance providers.

"The goal should be to deliver a market structure thatencourages far more dynamism, choice and innovation," JohnAllan, the FSB's national chairman, said.

The CMA said it would make a final decision in the autumnand has given banks and other market participants until Sept. 17to submit their views. It would be highly surprising if theinvestigation did not go ahead.

The big four banks had proposed improving competition inbusiness banking by setting up a comparison website to increasetransparency and make it easier for companies to switch banks,but the CMA said that would not appear to go far enough.

It would mark the second full-blown industry investigationbeing carried out by the CMA, after saying last month it wouldinvestigate competition among energy suppliers. ($1 = 0.5851 British Pounds) (Additional reporting by David Milliken; Editing by JohnStonestreet and Jane Merriman)