LONDON - Britain has held talks with investors to gauge their interest in buying its stakes in part-nationalized lenders, and could begin selling its holdings within a year, according to a person briefed on the matter.

A government source, however, told Reuters on Tuesday it is too early to talk about selling the stakes, and there will not be any rush to exit.

Shares in Royal Bank of Scotland and Lloyds Banking Group both rose over 4 percent in early trading as investors welcomed the positive signal that the state overhang could be reduced sooner than expected.

UK Financial Investments which manages Britain's stakes in RBS and Lloyds, has sounded out investors who may be interested in buying some of its holdings, said the first source, who was not authorized to speak publicly.

Some sales could take place over the next year, but the disposal process is likely to take a number of years to complete given the size of the government's stakes, the source added.

The government source downplayed the prospect of a quick deal: We won't be rushed into this, and UKFI will look seriously at this only when the conditions are right.

The Financial Times reported on Tuesday that UKFI has had substantial contact with potential investors including UK institutions and foreign sovereign wealth funds.

An investor in both Lloyds and RBS said there should be an appetite for the shares, but maybe not for at least a year.

These businesses will have to have shown very good signs of recovery before they can even contemplate selling these securities. I would say the time scale is more like 18 months to 2 years than 12 months, the investor said.

It could take even longer. Sweden, for example, remains the largest shareholder in Nordea, with a 20 percent stake, after the state had to rescue lenders during a crisis in the early 1990s.

STATE STAKE REDUCTION?

Britain, the United States and several other European governments have all stepped in to rebuild bank capital after a two-year financial crisis eroded balance sheets, leaving lenders vulnerable in the face of rising bad debts.

A recovery in stock markets in the past two months has lifted optimism that some of the taxpayer cash can be recouped earlier than expected.

U.S. banks including Goldman Sachs and Morgan Stanley have applied to repay billions of dollars they borrowed from the government as soon as possible, in an effort to signal their strength to investors, people familiar with the situation said on Monday.

Switzerland wants a rapid exit from UBS, but said it will only do so when it is stable and conditions favorable.

Lloyds shares have doubled since early March and RBS has risen fourfold from a January nadir.

By 7:50 a.m. EDT Lloyds shares were up 3.6 percent at 101.4 pence, after hitting 107.5p, and RBS was up 4.1 percent at 43p, after touching 44p.

Britain owns a 70 percent stake in RBS, mostly bought at 65.5 pence apiece as part of a 37 billion pound ($56.4 billion) industry rescue in October. More shares were bought at 31.75p.

The state has a 43 percent stake in Lloyds. It paid 173.3p for the Lloyds shares in October.

UKFI has said it aims to sell the bank stakes profitably on taxpayers' behalf but has not set a time frame for the disposal. It is expected to be sold through a series of tranches over a sustained period.

You'd expect UKFI to look at selling out. It's made it pretty clear it wants to make a profit for taxpayers and there's been a big rally in these stocks, said Alex Potter, analyst at brokerage Collins Stewart.

But I don't think it's going to be something that happens in the short term, as they'll realize they need to remain a stable investor for now and ultimately they can probably make significantly more money by selling later, Potter added.

(Additional reporting by Sumeet Desai and Raji Menon; Editing by David Holmes and Simon Jessop)

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