* Lloyds prefers pre-Xmas launch for capital plan -sources
* Rights issue could be launched on Nov. 2 - sources
* Banking fees could be 2 percent of rights issue-sources
* Govt source says no decision likely next week
* Lloyds declines comment
(Adds comment from government source)
By Victoria Howley and Douwe Miedema
LONDON, Oct 23 (Reuters) - Lloyds Banking Group faces a crunch week over its plans to plug a 20 billion pound ($33.30 billion) hole in its capital before Christmas, with a key decision resting with UK regulators.
Britain's largest retail bank, 43-percent owned by the government, hopes regulators will decide early next week to allow it to stay out of a UK scheme for bad debts, sources close to the matter said. That would enable it to complete its more than 11 billion pound rights issue in December, its preferred timeframe, the sources said.
However, a government source told Reuters it was "unlikely that a final decision will be made in the coming week".
If the regulators fail to decide, Lloyds would then likely have to sell its shares in the New Year because of the lull in markets over the holiday period, possibly putting it at a disadvantage as other companies queue up to tap equity markets.
The bank is considering alternatives to the state-backed Asset Protection Scheme (APS) to insure against losses from toxic debt for which it signed up earlier this year.
But it still needs a green light from Britain's three regulators, led by the Treasury, all of which are under pressure to avoid further trouble for banks. Executives have been in frantic daily discussions over the last two weeks according to one of the sources.
If Lloyds can get approval early next week, it can push ahead with pre-marketing to launch its more than 11 billion pounds ($18 billion) rights issue on Monday, Nov. 2, sources close to the matter said.
The share sale would then close on Dec. 11, the sources said and the rump, set to be small if the Treasury takes up its rights, would be placed on Dec. 14.
DEBT EXCHANGE
A debt exchange through which the bank aims to raise more than 5 billion to 7 billion pounds of contingent capital -- "top up" capital that can be converted into equity if the bank hits trouble -- is expected to run alongside the rights issue.
The overall package to plug Lloyds' capital deficit of more than 20 billion pounds is also expected to include asset sales.
"Lloyds definitely wants something sooner rather than later, closing before Christmas. Things would be very tight if you went beyond the timeframe outlined," one of the sources said.
Another source familiar with the situation, however, cautioned against assuming a make-or-break December deadline for Lloyds, with the process possibly going into next year, but said all parties were hoping for a quick solution.
Sources close to the situation have told Reuters that regulators -- keen to keep a fragile recovery on course -- are nearing a decision to approve the plan, but also that the Treasury must be convinced any agreement would be a better deal for taxpayers.
Economic data on Friday showed Britain is in the longest recession on record.
But with cracks appearing within the tripartite regulator -- the Bank of England (BoE), the Financial Services Authority (FSA) and Britain's Treasury -- and pressure to ensure Britain returns to economic growth, sources warned a "no" was still possible.
Newspaper reports have said the Bank of England in particular is concerned Lloyds will need to dip its hands back into taxpayers' pockets if the economy worsens.
Lloyds has not yet mandated banks for its rights issue, but sources close to the matter have said it has lined up UBS and Bank of America Merrill Lynch as lead underwriters. Citigroup, Goldman Sachs, JP Morgan Cazenove and HSBC will be joint underwriters.
According to one of the sources on Friday, fees could be above 2 percent, raising the prospect of a fat payday for Lloyds' bankers.
Lloyds, the FSA and the BoE declined to comment. The Treasury had no immediate comment. (Additional reporting by Matt Falloon and Clara Ferreira-Marques; editing by Erica Billingham and Karen Foster) ($1=.6006 Pound)