UPDATE 2-UK govt may force banks to lend to firms-reports

(Adds quotes from Prime Minister spokesman)

LONDON, Nov 21 (Reuters) - British finance minister Alistair Darling is considering tougher laws to force banks to lend to small businesses which are struggling with the global credit crunch, newspapers reported on Friday.

The reports said Darling was looking at measures which could include capping interest rates on loans to small firms, while a leading Labour politician accused the banks of "navel gazing" and even suggested full-scale nationalisation as a last resort.

A spokesman for Prime Minister Gordon Brown said government wanted to see banks delivering on their commitments to lend.

"In circumstances such as these, you have to look at all options," the spokesman told reporters. "But, of course, we want to work constructively with the banks."

Darling will deliver his pre-budget report on Monday, which will include measures to stimulate the British economy.

The Daily Telegraph and Daily Mail newspapers both reported that Darling is expected to introduce a new scheme to underwrite small business loans, but if banks fail to loosen their lending policy he would legislate to make them do so.

A Treasury spokesman declined comment.

John McFall, head of parliament's influential Treasury Committee, said major banks must start lending to small business or face increased public pressure for nationalisation.

There is growing anger at the apparent reluctance of banks to pass on cuts in official interest rates to mortgage holders or free up credit to small businesses -- particularly after several participated in a 37 billion pound government bailout scheme.

"Despite having been pulled back from the brink, the banks appear reluctant to launch their sizeable recapitalisation lifeboat and start lending again to households and businesses," McFall said in a statement.

"It would seem that they are instead navel gazing and looking warily at each other instead of concentrating on their customers."

McFall said that if the banks fail to comply, there could be a "nuclear option" of full-scale nationalisation.

However, the British Bankers Association (BBA) said tighter lending conditions reflected a combination of banks having to be more rigorous in assessing loans and businesses reining in their investment plans and lowering their overdraft needs.

BBA chief Angela Knight said loans would not be going to all firms because "not everyone has the right business model, not everyone has customers who are coming through their door".

"It does make absolute sense that what a bank must do is assess that the business that it is lending to is a viable business," she told BBC radio. "Most of the banks are getting proper arrangements in place to assist the small businesses through a difficult time."

Knight conceded interest rates for business loans had risen, but said this was because "the cost of money has gone up".

"It's a much, much harsher climate for money than it was, say, three years ago," she said. "There is also a requirement to do greater due diligence in some instances and there will be times in which there are small businesses who are not getting money which they believe they should be getting, but the reality is from a lending perspective it doesn't look sound."

"We have found as well that there are some non-bank lenders to small and medium-sized businesses who have come out of the market and I think some of the issue (of low loan levels) may be with them." (Reporting by Frank Prenesti and Matt Falloon; Editing by Stephen Nisbet)