UPDATE 3-UK to curb protection for savers, blames EU rules

* UK to cut depositor protection by 10,000 pounds

* Change required by 100,000-euro EU limit

* UK lawmaker calls requirement "absurd"

* Change to take effect from start of 2016 (Updates with reaction from British Bankers' Association)

By David Milliken

LONDON, July 3 (Reuters) - British savers will have less oftheir money protected if a bank fails next year, the governmentsaid on Friday, blaming European Union rules which one seniorlawmaker called "absurd".

Relations between Britain and the EU are already tense.Prime Minister David Cameron, who is trying to reshape relationswith the 27-member bloc before calling a referendum by the endof 2017 on whether to stay in, wants to ensure that Britain isnot disadvantaged by not using the euro.

The EU bars governments from offering more than 100,000euros ($110,000) of protection to savers if a lender collapses.It requires countries that are not in the euro, such as Britain,to adjust local currency limits once every five years.

Sterling has strengthened by around 20 percent since thelast change, so the limit for depositor protection will fall by10,000 pounds ($15,600) to 75,000 pounds from the start of 2016.

Andrew Tyrie, the Conservative legislator who heads theBritish parliament's finance committee, said the EU directivewhich requires this was "defective" and that he would askBritain's finance ministry to lobby the EU for changes.

"It is absurd that the depreciation of the euro, largelybrought about by the crisis in the euro zone in general and theGreek crisis in particular, should be forcing a reduction in thelevel of protection available to UK depositors," he said.

The British Bankers' Association called the change"disappointing", as customers were used to the 85,000 poundguarantee.

Britain's deposit protection scheme has paid out more than26 billion pounds to 4.5 million people since it was establishedin 2001. Major claims include Northern Rock, which suffered abank run at the start of the financial crisis in 2007.

Britain's finance ministry said less than 5 percent ofcustomers of banks, building societies and credit unions wouldbe affected by the lower limit.

The European Commission had no immediate comment.

Other changes to the deposit guarantee scheme are morefavourable for savers. Deposits of up to 1 million pounds willgain protection for up to six months in some circumstances - ifa customer has just sold a house or received an inheritance, forexample.

Large businesses and smaller local government authoritieswill also gain protection for the first time.

The Bank of England also said it was considering allowingpeople with deposits of more than 75,000 pounds in long-termsavings accounts to move their money without a penalty. ($1 = 0.9014 euros) ($1 = 0.6409 pounds) (Additional reporting by Francesco Guarascio in Brussels andMatt Scuffhamn in London; Larry King)