Goldman Sachs Group Inc reported stunningly strong quarterly earnings on Tuesday, overshadowing British financial regulators' move to follow their U.S. counterparts in pursuing civil fraud allegations against the dominant Wall Street bank.

Goldman's results came four days after the firm was accused of fraud by the U.S. Securities and Exchange Commission in the structuring and marketing of a debt product tied to subprime mortgages.

On the face of it, Goldman's numbers are pretty good, which they do time and time again, said David Morrison, market strategist for GFT Global Markets in London. Investors will want to focus on the blow-out numbers, but the news the FSA is also probing the firm takes some of the shine off.

Goldman said net income nearly doubled to $3.29 billion, bolstered by big gains in trading and debt and equity underwriting. The earnings of $5.59 a share beat analysts' average forecast $4.01 per share, according to Thomson Reuters I/B/E/S.

The bank reported its lowest-ever first-quarter compensation ratio, but it still set aside $5.5 billion for compensation and benefits in the period.

Goldman shares rose 1.8 percent to $166.21 in early trading. The cost of insuring against potential default on the bank's bonds fell.

Goldman emerged as Wall Street's most influential bank after the financial crisis but has faced a backlash over its pay and business practices.

The bank's co-general counsel, Greg Palm, launched a rebuttal of the SEC charges during the bank's earnings conference call.

Palm said the firm was very disappointed that the SEC had brought charges and insisted that Goldman would never mislead anyone.

He also said investors who lost money on the subprime mortgage product that is the focus of the SEC suit had a wealth of experience and background in such deals.

Amid speculation that the controversy could cost Goldman some customers, Chief Financial Officer David Viniar insisted that most remain loyal.

We are out talking to our clients, he told analysts on the conference call. You can see from our results last quarter that our clients still support us.

'RECKLESSNESS AND GREED'

Goldman's forecast-beating earnings came as Britain's Financial Services Authority (FSA) said it had started a formal investigation into Goldman Sachs International in relation to the SEC allegations. FSA said it would work closely with its U.S. counterpart.

UK Business Secretary Peter Mandelson said on BBC Radio, We have got to look at the whole system of constituting and regulating banks. We need a system of regulation, a system of levying banks, which is internationally applied.

Nick Clegg, leader of the Liberal Democrats, the UK's third-largest party, said the allegations against Goldman are a reminder, if we needed one, of the recklessness and greed that disfigured the banking industry as a whole.

In the United States, political tensions were heightened by reports that the five SEC commissioners split along political lines last week in a vote on whether to file suit against Goldman. The three Democrats voted in favor of the legal action, while the two Republicans opposed it, according to press reports.

I have my doubts about this attack on Goldman Sachs, for the simple reason that with two members of the SEC clearly against the indictment, it doesn't make (SEC Chairman) Mary Schapiro's job any easier, said David Buik, senior partner with BGC Partners in London.

(Writing by Christian Plumb; Additional reporting by Douwe Miedema and Jon Hopkins in London; editing by John Wallace)

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