Lloyds dividend in balance after close stress test pass

* Lloyds had core capital of 6.2 pct, above 5.5 pct minimum

* RBS (LSE: RBS.L - news) had core capital of 6.7 pct

* UK banks face further BoE stress test in December

* Lloyds must prove capital strength for dividend clearance (Adds reaction from government, Lloyds Banking Group)

By Matt Scuffham

LONDON, Oct 26 (Reuters) - Britain's Lloyds Banking Group narrowly passed a test set by European regulators to assess whether banks have enough capital to weather another economic crash, calling into question its chances of re-starting dividends.

Lloyds, which is 25 percent owned by the British government after being rescued during the 2007-2009 financial crisis, would hold a core Tier 1 capital ratio of 6.2 percent under the stress-test scenarios, above the 5.5 percent minimum required.

The close outcome could have implications for Lloyds, which is in talks with Britain's financial regulator about restarting dividend payments and must prove it has the capital strength to cope with future market shocks to gain permission to do so.

Like other British banks, Lloyds faces a further test of its capital strength by the Bank of England in December.

The BoE said on Sunday that the European results should not be seen as indicative of the result of its own test, which assesses banks under a scenario where house prices fall by 35 percent and interest rates rise to 6 percent. The BoE test will place additional pressure on Lloyds, which is Britain's biggest provider of residential mortgages.

Banking sources said on Sunday that Lloyds remained confident of passing the BoE test, clearing the path for it to pay a dividend for the 2014 financial year and for the government to sell off more shares in the bank.

They pointed out that the bank will benefit from its improved capital position since the end of 2013 being taken into account in the BoE test while one-off costs associated with hiving off its TSB business are not included. Lloyds' core capital had risen to 11.1 percent at the end of June, 2014, compared with 10.3 percent at the end of June.

The result of the BoE test will be a key factor in determining whether Lloyds can pay a 2014 dividend. Reuters reported earlier in October that the government is unlikely to sell more shares until the bank is ready to pay dividends.

Lloyds said the result of the European test "reflects the steps taken by the group's management over the last three years to return its balance sheet to a robust position".

Rival state-backed lender Royal Bank of Scotland, which is 80 percent owned by the government, passed the European test and would hold core capital of 6.7 percent under the adverse scenarios, the European Banking Association said.

Barclays (LSE: BARC.L - news) passed the test with core capital of 7.1 percent while HSBC passed with core capital of 9.3 percent.

"This shows our robust reforms to build a more resilient banking sector are working," said Andrea Leadsom, Britain's Economic Secretary to the UK Treasury.

Industry sources had expected that RBS would be the British bank that fared weakest in the test and the result reflects progress made by Chief Executive Ross McEwan in simplifying the bank and bolstering its capital strength.

RBS will also enter the BoE's test in a stronger position.

The bank's core capital ratio had risen to 10.1 percent at the end of June, up from 8.6 percent at the end of 2013. It has since strengthened its capital again as a result of a stock market listing of its U.S. business Citizens (NYSE: CIA - news) in September. (Editing by Catherine Evans)