Top UK pension fund suspends stock lending-sources

* BT pension scheme has blanket ban on stock lending

* Scheme considers blanket ban prudent

* Ban indicates short-selling could still hurt market

By Raji Menon

LONDON, March 30 (Reuters) - The BT (BT.L) Pension Scheme (BTPS) has suspended all stock lending on concerns that short-sellers using the shares could further hurt market sentiment, two sources close to the pension scheme said.

The BTPS, Britain's largest pension scheme, in September placed some 20 British and global financial companies on its list of stocks it had barred from lending, but has now widened the ban.

"The BT Pension Scheme stopped all stock lending not just on financial stocks some months ago. Cannot say if the (decision) is permanent but it is still considered to be prudent at this time," one of the sources said.

Britain's Financial Services Authority in September banned short-selling -- or betting that a share price will drop -- of financial stocks amidst heavy market gyrations in the wake of the Lehman Brothers bankruptcy.

To execute their trades, short-sellers often borrow stock from institutions such as pension schemes. As a result, stock lending volumes are seen as a reliable indicator for levels of shorting activity.

The UK watchdog lifted its short-selling ban on Jan. 16, and some pension funds are now planning to resume lending.

"At the moment, we are not stock lending," the second source close to the pension scheme said.

The BTPS has around 39.7 billion pounds ($56.29 billion) in assets under management.

Another large pension scheme, the London Pension Fund Authority (LPFA) recently said it was preparing to resume stock lending as it had found no evidence to link stock lending to short-selling.

Institutions that lend securities profit by charging fees to the borrower. Stock lending generated some 700,000 pounds in income each year for LPFA. (Editing by David Cowell)