* UK car, home insurance market worth 18 bln pounds
* Watchdog: complex practices allow insurers to raise prices
* Six million policyholders paid high prices in 2018 - FCA
* May limit price rises on customers who do not switch policy
* Insurer shares fall, Saga falls as much as 11% (Recasts with FCA news conference, adds comment, updates shares)
By Huw Jones and Carolyn Cohn
LONDON, Oct 4 (Reuters) - Britain's markets watchdog threw down the gauntlet to car and home insurers on Friday, saying they could avoid mandatory pricing restrictions if they voluntarily stop penalising loyal customers.
The Financial Conduct Authority (FCA), in long-awaited interim conclusions from a study launched a year ago into how car and home insurers treat customers, said on Friday firms use complex pricing practices that allow them to raise prices for consumers that renew with them year on year, known as "price walking".
"Remedies are inevitable," Christopher Woolard, the watchdog's executive director for competition, told reporters.
"Whether those are remedies imposed through FCA rules, to some extent is up to industry. They can be remedies that are agreed on a voluntary basis," Woolard added.
The watchdog is not interested in extended dialogue with insurers over changes, Woolard said.
"The ball is now very much in the hands of the industry."
The Association of British Insurers said it agreed home and motor insurance markets could work better for customers who do not shop around at renewal, and that it would work with the regulator on the issue.
Six million car and home insurance policyholders paid high prices in 2018 in the 18 billion pound ($22 billion) market, the watchdog said. If they had paid the average price for a policy, they would collectively have saved 1.2 billion pounds.
This includes one in three people whose financial position is potentially vulnerable.
"It is shocking that insurance firms have got away with increasing prices for those customers who are least able to switch," said Helen Undy, chief executive of the Money and Mental Health Policy Institute.
The FCA is considering curbs on firms charging higher prices to consumers who do not switch, for example, by restricting or banning "margin optimisation" based on consumers’ likelihood of renewing.
JPMorgan Cazenove analysts said the FCA scrutiny would "act as an overhang" on general insurers, highlighting Direct Line , Saga, and Admiral as most at risk.
Shares in Saga, which offers insurance and travel to the over-50s, tumbled as much as 11% after the watchdog announced its proposals, before recouping some losses. Direct Line Insurance, Aviva and Hastings also dropped.
"At the moment these are just proposals. The FCA must now follow through on these bold ideas to stop loyal insurance customers being penalised," said Gillian Guy, chief executive of consumer group Citizens Advice.
Citi analysts said the report was "frustratingly light on actual suggestions and is more of a rehash of the options ... available".
Insurers have already been drawing up new policies on how to deal with vulnerable customers, one industry source said.
More than 45 million home and motor insurance policies were written in 2018, and home and motor insurance generated 18 billion pounds in gross premiums last year. The FCA said 82% of adults in Britain have at least one general insurance policy.
It plans to publish a final report and consultation on remedies in the first quarter of next year.
Woolard declined to comment on potential enforcement action.
"There is no suggestion in this of an industry that has been breaching rules on a wholesale basis," he said.
($1 = 0.8099 pounds) (Reporting by Huw Jones, Editing by Susan Fenton and Mark Potter)