Britain will start selling its shares in Lloyds Banking Group to pension funds and insurers later this year, rejecting interest from private equity and sovereign wealth funds, industry and political sources have said.

The government could sell up to a quarter of its 39 per cent stake as early as September, the sources said, especially if the bank’s first-half results, due in August, are well received.

Lloyds is expected to report a sharp rise in profit, which would raise hopes it can start paying dividends again in 2014 and increase its attractiveness to investors.

Britain's Conservative-led coalition government sees a sale as a milestone in Britain's recovery from the 2008 crisis, during which taxpayers pumped a combined £66 billion into Lloyds and Royal Bank of Scotland.

Sources with knowledge of government thinking said it was cool on the idea of a sale to private equity or sovereign wealth funds, despite expressions of interest, and would require such investors to pay at least market price or a premium to guarantee value for taxpayers.

It wants to avoid the possibility of being seen at a later date to have sold off the assets too cheaply to overseas buyers.

The government wants the deal to be free of controversy in order to garner maximum political benefit in the run-up to a 2015 general election. The sale will take the form of an “accelerated book build“ in which up to 10 per cent of shares in the bank would be sold to financial institutions, raising between £4 billion and £5 billion.

A sale to institutions could be made at about a 5 per cent discount, said banking sources.

Bankers see September as a realistic date for kicking off the sale. And UK Financial Investments, which manages the government's stakes in Lloyds and RBS, is in the process of appointing advisers for a sale.

Shares in Lloyds are trading about the 61.2p level, which the coalition regards as break-even. – (Reuters)