* UK banks using FLS cut net lending by 2.425 bln stg in Q4
* Some economists say FLS weakness boosts case for more QE
* BoE says banks have taken almost 14 bln stg of FLS funds
* BoE and banks blame seasonal factors for fall in lending
The Bank of England's flagship plan to boost lending not only failed to increase bank loans late last year but also to reverse their decline, adding to pressure on the central bank for another boost to the economy.
The Funding for Lending Scheme (FLS) was launched by the central bank and Britain's finance ministry in June last year, aimed at boosting growth by offering banks cheap funds if they stepped up lending to home-buyers and small and medium-sized businesses.
Monday's data shows that while banks and building societies have drawn down almost 14 billion pounds of cheap central bank funds, net lending has actually gone into reverse.
Britain's economy looks increasingly like it may be tipping into its third recession in four years, following very weak construction data earlier on Monday and an unexpected contraction in factory output reported last week.
Borrowers repaid banks and building societies some 2.425 billion pounds more than they lent in the last three months of 2012, turning around a small rise in lending in August and September.
"It is pretty clear that the FLS is not living up to expectations," said Michael Saunders, chief UK economist at Citi. "The limited impact from the FLS raises the likelihood of other forms of easing and additional credit easing in our view."
The central bank will decide on Thursday whether to restart its programme of government bonds purchases, also known as quantitative easing.
Last month, three officials - including Governor Mervyn King and Paul Fisher, who is in charge of the FLS - favoured buying a further 25 billion pounds of bonds on top of the 375 billion bought between March 2009 and October 2012, while others felt alternative stimulus might be more effective if needed.
If wavering policymakers conclude the FLS is not having the desired effect, this could cause them to back more bond buying. But it is far from certain that they will draw this conclusion.
Although the scheme has not yet succeeded in boosting lending, it has helped markedly reduce banks' borrowing costs, which has in turn fed through to lower interest rates and easier terms and conditions for some borrowers.
The central bank said the fall in lending in the last three months of 2012 was due to seasonal factors. Lending picked up strongly in January, albeit based on data that includes banks such as HSBC which did not join the FLS.
"I would not expect to see a return to rising aggregate quantities until we start getting data for 2013 at the earliest," the BoE's Fisher said.
"It is still quite early for much extra money to have flowed from the application stage into actual loans, compared with previous plans which showed that lending was most likely to fall in aggregate without the FLS."
The British Bankers' Association said demand for lending was muted in the last three months of 2012, citing both a seasonal dip and firms' broader concerns about the economic outlook.
But some economists did see encouraging signs in the scheme data, particularly the fact that almost 10 billion pounds had been drawn down by banks in the last three months of 2012, double the sum in the first two months of the scheme.
"It's not been an overnight surge, but it's moving in the right direction," said Alan Clarke of Scotiabank. "It was a bigger number than I thought would come."
Banks have until the end of this year to draw down funds equivalent to 5 percent of their loan book - roughly 70-80 billion pounds based on current lending - but will face penalty interest charges if they do not maintain or increase lending over the period.
Business associations' reaction to the FLS was mixed.
The British Chambers of Commerce, which represents many small firms, said Monday's figures were "disappointing", while the Confederation of British Industry, which represents bigger firms that generally have easier access to credit, said its members were reporting lower finance costs.
The aggregate FLS figures mask wide differences between lenders. Newer entrants to Britain's concentrated banking market, such as Aldermore, Metro Bank and Shawbrook Bank, have increased lending sharply.
But far larger, more established banks such as Royal Bank of Scotland, Santander and Lloyds Banking Group feel under regulatory pressure to reduce much non-core lending, and have cut lending by several billion pounds each.
Bucking this trend among major lenders are Barclays , which has increased net lending by 5.7 billion pounds, and Nationwide Building Society, where lending has risen by 3.6 billion pounds.