UK watchdog looks at alleged bond market rigging at Lloyds bank -source

LONDON, Jan 7 (Reuters) - Britain's Financial Conduct Authority has begun a preliminary investigation into whether a trader at Lloyds Banking Group (Other OTC: LLOBF - news) tried to manipulate the market for UK government bonds, a source familiar with the matter said.

Spokespeople at Lloyds, still 9 percent-owned by the British taxpayer, declined to answer questions on whether there was a probe or on the number of staff linked to any such investigation.

"The Group does not comment on speculation," a spokesman told Reuters in an emailed statement.

News (Other OTC: NWSAL - news) of the probe comes as a blow to Britain's biggest provider of current accounts and mortgages, which has invested millions of pounds in rebuilding its reputation among customers since its 20.5 billion pound ($29.9 bln) bailout in 2008.

It (Other OTC: ITGL - news) also casts a pall over final preparations by Britain's finance ministry to sell its remaining stake via a widely anticipated share offer to the general public this year.

The government said in October it would sell at least 2 billion pounds of Lloyds shares to private retail investors in one of the largest privatisations of a state-backed company since the 1980s.

Lloyds shares were trading 2.7 percent down at 69 pence at 0935 GMT, well below the average 73.6 pence the government originally paid for the shares, and the threshold set by managers of a trading plan designed to dribble out the government's stock to the market.

The Wall Street Journal first reported the investigation into possible gilts market manipulation on Wednesday.

In March 2014, the FCA fined and banned former Credit Suisse (LSE: 0QP5.L - news) bond trader Mark Stevenson in its first enforcement action for allegedly manipulating the 7 trillion pound UK gilts market.

The latest probe puts pressure on a sector that is trying to rebuild trust after 11 banks, including Lloyds, were fined about $10 billion for attempted rigging of Libor, a global interest rate benchmark.

Other lenders have also been punished for attempting manipulation of the foreign exchange market.

($1 = 0.6864 pounds) (Reporting by Huw Jones and Sinead Cruise; Editing by Rachel Armstrong and Susan Fenton)