Sterling falls vs dlr on bank shake-up; BoE eyed

* Stg hits 1-week low vs dlr; recovers vs broadly weak euro

* UK govt announces bank shake-up, raises stake in RBS

* Lloyds launches record rights issue

* BoE seen increasing QE on Thurs

By Jessica Mortimer

LONDON, Nov 3 (Reuters) - Sterling fell to a one-week low against the dollar on Tuesday after the UK Treasury announced a shake-up of British banks and as investors braced for a possible extension of asset purchases by the Bank of England this week.

Britain's two largest retail lenders, the part-nationalised Royal Bank of Scotland (RBS.L) and Lloyds Banking Group (LLOY.L), will between them sell off businesses equating to 10 percent of the UK retail banking market to appease EU competition concerns.

The government will raise its stake in Royal Bank of Scotland, while Lloyds will drop out of a government-backed insurance scheme for bad debts by raising 13.5 billion pounds in the world's largest rights issue. ID:nL3540088]