LONDON (Reuters) - British retail banks should stop paying big cash bonuses and use the money instead to support new lending and contribute to an economic recovery, the opposition Conservatives' finance spokesman George Osborne said yesterday.

The policy announcement by the Conservatives, who opinion polls predict will defeat the ruling Labour Party in a national election due by June 2010, reflects international disquiet about the scale of bonuses at banks which received government support.

US President Barack Obama said on Saturday that banks which had received state support had a responsibility to lend more to small businesses, and Bank of Canada Governor Mark Carney said on Monday banks' recent bonus awards showed hubris.

Investment bank Goldman Sachs recently set aside $16.8 billion to pay staff — drawing criticism last week from British finance minister Alistair Darling who said some banks manifestly did not understand public outrage at large bonuses.

However, the British Bankers' Association said Osborne's plans were mis-targeted, as British retail banks rarely paid bonuses on the scale of dedicated investment banks, and most did not have large investment banking divisions.

Osborne said his proposal to force British retail banks to pay all bonuses of over £2,000 ($3,268) in shares rather than cash would free up more money for lending to business.

"I am today calling on the Treasury and the FSA to combine forces and stop retail banks ... paying out profits in significant cash bonuses — that includes their investment banking arms," Osborne said at a Reuters Newsmaker event.

"The cash that would have been paid out should be put onto banks' balance sheets explicitly to support new lending. This should be a condition of continuing to receive taxpayer guarantees and liquidity support."

Osborne said laying out a credible plan to tackle Britain's budget deficit — seen hitting more than 12 percent of gross domestic product this fiscal year — was essential if the economy was to recover and to retain market confidence.

The Conservatives want to cut back borrowing more sharply than current government plans to halve the deficit in four years. However, Osborne said it was too early to say when or by how much a Conservative government would cut the deficit.

"I have not set a target date yet because that is something that is an absolutely key judgment for a new government," he told Reuters. "I need to know what the current figures are before I make what will clearly be a key judgment."

The government took large stakes in several British financial institutions, including RBS and Lloyds, to help the sector survive the financial crisis and policymakers have called for an increase in lending in return.

"UK banks understand that stories about high pay and bonuses cause anger and concern individuals," the British Bankers' Association said in a statement.

"However, the big bonus culture is not in retail banking but investment banks. Most retail banks are weathering the economic downturn well and have not used any taxpayers' money." The G20 group of developed and emerging economies signed up to payment reforms last month, including subjecting bonuses to clawback and deferral — but investment banks are already sizing up big bonuses this year.

The Centre for Economics and Business Research said last week payouts in Britain would hit £6 billion ($10 billion) in this year's bonus round, up by half from £4 billion in 2008 but still well below the £10.2 billion paid in 2007.

Finance minister Darling has promised laws to end a "reckless culture" at banks, and the FSA — Britain's financial watchdog — has said it would take action against those that channel profits into bonuses rather than build up capital.

Earlier on Monday, French central bank Governor Christian Noyer said banks were starting to repeat the mistakes that had led to the current financial crisis, and investor George Soros has also said the public are right to be upset by bank bonuses.