Britain's Lloyds Banking Group said it was still assessing ways to exit or reduce its participation in a state scheme to insure its toxic assets, after reports it plans to raise 25 billion pounds.

The part-nationalized bank will struggle to leave the asset protection scheme (APS) altogether and a lot depends on whether UK regulators see its plan as too risky and on the remedies imposed by European competition authorities, analysts and investors said.

It is feasible that Lloyds could raise 25 billion pounds through, for example, 10 billion pounds of asset sales and liability management, and a 15 billion pound rights issue with UKFI (UK Financial Investments) subscribing to just over half of that, said analyst at Credit Suisse.

But execution risk is likely to determine whether this is allowed...we still think that Lloyds will struggle to escape APS altogether, with a marked reduction in participation most likely, it added.

By 1024 GMT Lloyds shares were down 3.24 percent at 92.5 pence, the biggest faller in the FTSE 100 share index.

There are a range of options available to us and we continue to monitor them, a Lloyds spokesman said. We issued a stock exchange announcement two weeks ago and our position has not changed since then.

Lloyds said on September 18 it was in talks with the government and financial regulators over possible alternatives to the scheme and that all options were open. Lloyds will insure 260 billion pounds of risky assets under the APS, but it is regarded as an expensive option.

Lloyds was gauging appetite for a bumper rights issue of as much as 20 billion pounds to allow it to avoid the 15.6 billion pounds in fees it would have to pay in order to take part in the scheme, Reuters reported in August.

Lloyds was now sounding out investors about a 15 billion pound rights issue so that it could avoid the scheme, the Financial Times reported Thursday. It has presented Britain's Financial Services Authority with a plan to raise a total of 25 billion pounds through a rights issue, asset disposals and other measures, Sky News said.

A top 10 investor, who asked not to be named, said the bank appeared to be gauging appetite for its various options.

I think it's kite flying -- this a very substantial amount of money and they are supposedly sorting out the APS and I would think they would need to make some big changes, he said.

UKFI SUPPORT?

A key issue will be whether a rights issue is supported by UKFI, the body that holds Britain's 43 percent stake in the bank, the investor said.

A 15 billion pound rights issue would entitle the government to buy up to 6.5 billion pounds in the offer, or pump in less cash and see its stake diluted.

Watching this evolve from the sidelines is probably sensible, the Credit Suisse analysts advised clients.

They said a rights issue could be supplemented with 10 billion from asset sales and management of existing liabilities.

But another risk is how European regulators will respond to any reduction in state support and what remedies Brussels is likely to impose on the bank.

The European Union's antitrust chief Neelie Kroes said late last month that Lloyds would need to shrink its activities to compensate for its bailout by the British government.

Lloyds will have to weigh up whether the risks involved in staying out of the scheme and the resulting loss of government protection will be sufficiently offset by what it hopes will be more lenient treatment from EU antitrust authorities.

(Additional reporting by Raji Menon and Clara Ferreira-Marques; Editing by David Cowell)

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