* Loans limited to 4 times income on 500,000 stg+ properties
* Bank estimates move will affect 8 pct of lending in London
* Lloyds says still supports UK's mortgage guarantee scheme (Adds comments from mortgages director)
By Matt Scuffham
LONDON, May 20 (Reuters) - Lloyds Banking Group, Britain's biggest retail bank, has tightened its lending criteria to help tackle rising prices in London's housing market.
The bank, which is 25 percent owned by the government, said on Tuesday it would limit mortgages to a maximum of four times a borrower's annual earnings when it is lending more than 500,000 pounds ($842,400) on a property.
House prices are soaring in London as the economic recovery and record-low interest rates tempt purchasers back into one of the world's most expensive property markets. London house prices were almost 30 percent above the peak seen in 2007, Lloyds said.
Lloyds said the new policy, which will affect about 8 percent of its lending in London, was a "targeted response to an issue largely in the upper tiers of the London housing market".
"This is largely driven by issues of supply which are particularly acute in London and this is having an impact on income multiples which are failing to keep pace with asset growth," said Stephen Noakes, group director of mortgages.
Noakes said Lloyds still supported the government's Help to Buy mortgage-guarantee scheme, which helps people buy property with deposits as low as 5 percent of the property price.
Bank of England Governor Mark Carney warned on Sunday that the housing market posed the biggest domestic risk to the financial stability of Britain's $2.5 trillion economy.
"This is a commercial decision for the firm," a spokeswoman for the BoE said on Tuesday.
$1 = 0.5935 British Pounds Reporting by Matt Scuffham; Editing by Steve Slater