UPDATE 2-UK's competition watchdog raps Barclays over treatment of small businesses

* Barclays to pay 2000 pounds to account holders

* Barclays asked to appoint independent body

* Barclays says "mistake" affected small number of customers (Adds Barclays statement, details on SME lending)

By Noor Zainab Hussain and Shashwat Awasthi

July 4 (Reuters) - Britain's competition watchdog said it has directed Barclays Plc to improve the way its treats small businesses after the bank broke the rules by forcing some to open current accounts to access other services like loans.

The rules were designed to make it easier for small businesses to switch bank accounts and access particular financial products.

The Competition and Markets Authority (CMA) said Barclays had admitted that it had not complied with the rules but has since taken steps to fix the issue, such as changing terms and conditions and allowing businesses to switch.

"We've been working closely with the CMA and have corrected a mistake we made which affected a small number of business customers. We've taken steps to ensure that this does not happen again," a Barclays spokesperson said in an email.

Barclays will pay about 2,000 pounds ($2,515.00) in total compensation across affected business premium account holders to reimburse them for payments they should not have had to make, the CMA said.

The CMA also said it had asked Barclays to appoint an independent body to audit the bank's compliance with rules on the treatment of business customers.

Eight banks including AIB, Bank of Ireland, Barclays, Clydesdale, HSBC, Lloyds, Danske Bank and RBS are prohibited from bundling products.

"The Undertakings are clear that banks must not force small businesses to have current accounts with them, as part of a practice known as bundling," CMA Senior Director Adam Land said.

Lenders approved more than 290,000 loans and overdrafts to SMEs across Britain and Nothern Ireland in 2018, offering aggregate borrowing facilities worth 28 billion pounds, UK Finance said.

The CMA said the law prevents it from imposing fines for breaches of either orders or undertakings. ($1 = 0.7952 pounds) (Reporting by Noor Zainab Hussain and Shashwat Awasthi in Bengaluru Editing by Rachel Armstrong and Elaine Hardcastle)