UPDATE 3-UK banks told to plug 25 billion pound capital hole

* RBS shares fall, seen facing biggest capital shortfall

* Big banks must meet Basel III by Dec, five years early

* Shares in HSBC, Barclays, Lloyds firmer

* Banks face regular stress tests from 2014

By Huw Jones and Matt Scuffham

LONDON, March 27 (Reuters) - Britain's banks must raise 25billion pounds ($38 billion) of extra capital by the end of theyear to absorb any future losses on loans, the central banksaid, less than investors had expected.

Replenishing banks' capital buffers, decimated by thefinancial crisis and heavy fines for misconduct, is a crucialstep for returning part state-owned lenders RBS andLloyds to full private ownership by the 2015 generalelection.

Bank of England Governor Mervyn King said the move announcedon Wednesday to strengthen banks should also allow them to lendmore and support economic growth.

He said plugging the capital shortfall was "manageable" andthe banks won't need taxpayers' money.

But UK business minister Vince Cable said forcing banks toraise capital will prolong the time it takes for the economy torecover by further depressing already weak lending to smallbusinesses.

The central bank said major lenders should achieve a coretier 1 capital ratio - a bank's main benchmark of health - of atleast 7 percent of their risk-weighted assets.

RBS and Lloyds and two other banks, HSBC andBarclays, dominate the market with 74 percent ofdeposits.

Banks have already announced some plans to bolster capitalwhich, along with their expected earnings this year, shouldcover half of the required 25 billion pounds.

The amount they have to raise is less than investors hadexpected. The central bank said last year the figure could be ashigh as 60 billion pounds.

Shares in RBS were down 2.6 percent while Lloyds jumped 2.8 percent, with Barclays up 0.6 percent andHSBC flat. The UK stock market was down 0.1 percent.

"You can pretty much guess HSBC is going to be in surplusand that Barclays, RBS and Lloyds have probably got a shortfalland I would guess the shortfall is probably biggest at RBS,"Shore Capital analyst Gary Cooper said.

The central bank did not give a breakdown of how much eachbank needed to raise.

DIVIDEND CURBS

Banks are expected to say how they will raise the money inthe next few weeks. Analysts expect them to continue withmeasures such as curbing dividends and bonuses and sellingassets, although some new capital may be needed.

Banks will have to hold a set amount of capital so they arenot tempted to cancel loans to bump up their capital ratios.

Those holding large amounts of risky commercial property orare exposed to struggling euro zone countries such as Greece orSpain will have to hold even more capital above the 7 percenttarget.

RBS said its capital position was strong and that it wasworking with regulators, while Barclays said it was "profitable,strong and well-capitalised".

Santander UK said it would continue to maintain itscapital ratios above the industry average.

HSBC and Lloyds declined to comment.

Wednesday's announcement outlined two phases: the Decemberdeadline for the minimum capital level, five years earlier thanthe globally agreed timetable under the Basel III accord, andregular stress testing of banks beyond 2014 that will lead tofurther capital increases.

The big banks are expected to have capital ratios of 10percent by the end of 2018.

Andrew Bailey, chief executive of the Prudential RegulationAuthority, the UK's new banking supervisor from April 1 when theFinancial Services Authority is scrapped, will meet banksindividually after Easter to vet their plans.

From April, the central bank's Financial Policy Committee,tasked with spotting broader risks in the financial system, hasthe power to direct regulators to force banks to comply withrequests to bolster capital.

Bailey began his checks on how banks calculate risk on theirbooks to determine overall capital requirements last Novemberand has expressed concern about inadequate provisions for losseson loans.

All four of Britain's biggest banks have been hit with finestotaling more than 14 billion pounds so far for mis-selling loaninsurance, putting further strain on capital.

UK lawmakers are also putting pressure on regulators toincrease competition in a sector.