UPDATE 1-LSE set for system test to decide trading plan

* Test is crucial to roll-out plan for main UK share trading

* Exchange is staking reputation on IT

* LSE says issue now fixed, Turquoise trading well (Adds LSE comment)

By Luke Jeffs

LONDON, Oct 8 (Reuters) - The London Stock Exchange will this weekend test the technology that paralysed one of its markets this week to assess if the group can risk switching its main UK business to the system next month.

The British exchange wants to upgrade its UK equity order book Sets from its existing technology to a faster and more flexible alternative called Millennium on Nov. 1.

The plan has been called into question after the LSE on Tuesday closed the exchange's European book, Turquoise, which moved over to Millennium last weekend.

Turquoise closed for an hour and a quarter at market opening, after what was flagged by the LSE as a dry run for the Nov. 1 migration of the Sets order book.

The LSE told Reuters the glitch was down to a failed network card, but that the issue was now fixed, and that Turquoise had been trading well since Tuesday.

"We have achieved the migration in less than nine months as we are determined to ensure Turquoise is the most competitive MTF in Europe," David Lester, chief executive of Turquoise, told Reuters.

Chi-X Europe and Bats Europe are so called multi-lateral trading facilities (MTFs), which have emerged in the past three years to challenge the LSE with faster and cheaper services based on what they say is state-of-the-art technology.

LSE clients have this week expressed concerns and warned the bourse it risks reputational damage if this week's Turquoise problem is repeated on the far-larger Sets next month.

"The LSE is behind the curve on technology. Rivals such as Chi-X and Bats have an advantage because they are smaller and more dynamic," said Simon Maughan at brokerage MFGlobal.

The British exchange plans to test the software this weekend and will take a decision on the Nov. 1 deadline next week, according to sources close to the LSE.

The LSE started to fight back last October when it bought Sri Lanka-based MillenniumIT for $30 million and outlined an ambitious plan to move its main trading platforms onto the latter's more advanced technology. (Editing by David Holmes and Will Waterman)