* NBNK says thinks was political interference in process
* Lloyds says Co-op picked for financial, deal reasons
* Lloyds became aware of Co-op problems in December
* Moody's downgrades Co-op Bank ratings
By Matt Scuffham and Steve Slater
LONDON, June 18 (Reuters) - British bank Lloyds has denied being subject to political pressure to sell hundreds of branches to the Co-operative Group, rebutting suggestions of ministerial interference in the controversial sale.
Lloyds has been forced to sell the 632 branches by European regulators as a cost of its taxpayer rescue in 2008, but its choice to sell to Co-op Bank has been slammed after a big hole appeared in the mutual's finances, prompting allegations that politicians had encouraged the choice.
"What the board looked at was financial and the ability to execute (the sale). Those were the only two things we looked at, no political (pressure)," Lloyds Chairman Win Bischoff told a committee of lawmakers on Tuesday.
The Treasury Select Committee quizzed Lloyds executives on their decision, since abandoned, to sell the branches to the Co-op, rather than to a rival start-up bidder NBNK, which said it made a higher offer.
Peter Levene, former chairman of NBNK, said in written evidence to the committee there appeared to have been political interference in the bidding process.
Co-op withdrew its offer to buy the branches in April after it was found to have a capital shortfall, which Britain's regulator has since pegged at 1.5 billion pounds ($2.4 billion).
Ratings agency Moody's on Tuesday piled more pressure on the Co-op, downgrading its senior debt and deposit ratings. The mutual, which has 4.7 million bank customers, is forcing bondholders to take losses under its rescue plan.
Lloyds picked Co-op as the winner of the auction last July and executives said they only realised there was a problem with Co-op's capital strength in December.
NBNK's Levene said it had offered more money than the Co-op and was the only bidder to meet the timetable set out by Lloyds for second-round bids, which the bank extended to allow the Co-op to make its offer.
He said he had received "a number of messages indicating that there had been significant political involvement leading up to the original decision", as the coalition government had wanted to promote the interests of mutuals in financial services.
"I was therefore advised that the decision was based on an indication from senior politicians within the coalition that the Co-op deal was to be the preferred and definitive solution," Levene said in a submission to the committee.
Lloyds CEO Antonio Horta-Osorio rejected Levene's claims that Lloyds preferred the Co-op. "I seriously contest that. The offer in the end was not substantially better ... we chose the best bid," he said.
NBNK was allowed to make five bids and it should have made a higher offer to succeed, Horta-Osorio said.
Both offers had complex structures. Co-op's bid was worth about 700 million pounds and NBNK's offer may have been just 630 million, Lloyds estimated.
Horta-Osorio estimated it would cost Lloyds about 1.6 billion pounds to spin-off and separate the branches.
The Lloyds executives said they discussed the bid process with government ministers.
"There was no preference expressed to us by government ministers," Bischoff said. He said after the bank picked the Co-op ministers were pleased with the decision and indicated they liked the mutual sector.
Lloyds said it had contacted 42 potential bidders for the branch network, codenamed Project Verde, which ended with confirmed bids by Co-op, NBNK and Sun Capital.
NBNK released a document it said it gave Lloyds in January 2012 saying there was a "high risk" the Co-op's purchase of the branches would fall through, citing its stretched capital position and execution risk.