* Barclays tumbles 10 pct, wiping $2.3 billion off its price
* UK banking shares fall after Libor probe settlement
* UK PM Cameron says Barclays need to answer serious questions
* Barclay's CEO Bob Diamond says behaviour was inappropriate
By Matt Falloon and Kirstin Ridley
LONDON, June 28 (Reuters) - Britian's Prime Minister and Barclays shareholders have piled pressure on the bank's Chief Executive Bob Diamond over attempts to manipulate lending rates.
In a scandal that has raised anger over how financial markets operate and is expected to engulf other banks, shares in Barclays tumbled as much as 18 percent at one point on Thursday, wiping out 4.2 billion pounds from its share price - the biggest one-day fall since 2009, according to Reuters data.
Growing pressure on the bank and its board led Diamond to write an open letter to Andrew Tyrie, chairman of the Treasury Select Committee, on Thursday night explaining the bank's actions and how it plans to deal with the scandal.
In his letter, Diamond said the investigation highlighted two types of manipulation used by the bank, and he would happily attend a Treasury Committee meeting on the issue.
He said Barclay's traders had attempted to influence submissions for their own "benefit", but there had also been a decision to improve market perception of Barclays by lowering the rate the bank submitted during the crisis.
This is, of course, wholly inappropriate behaviour," Diamond said in his letter.
Although admitting a decision was made to attempt to manipulate the Libor rate, Diamond did not state, in his letter, who made the decision.
"Even taking account of the abnormal market conditions at the height of the financial crisis, and that the motivation was to protect the bank, not to influence the ultimate rate, I accept that the decision to lower submissions was wrong," he said.
He said it was important Barclays takes further action and demonstrates responsibility, while reiterating that he and three other senior bankers at the bank would forgo their bonuses.
The bank agreed to pay a record $453 million fine to U.S. and British regulators for attempting to manipulate the London Interbank Offered Rate in 2005-08. It is the first bank to settle in a case that also includes most of the world's other largest financial institutions.
"This is a scandal, it's extremely serious. They've paid a very large fine and quite rightly but frankly the Barclays management team have some big questions to answer," Prime Minister David Cameron told the BBC.
"Who was responsible? Who was going to take responsibility? How are they being held accountable?" he said.
He and finance minister George Osborne both said regulations would be reviewed and tightened if necessary.
Diamond has acknowledged that the settlement would damage customer trust in the bank. Politicians, including some from Cameron's Liberal Democrat coalition partners, say Diamond should resign.
The LIBOR rate, compiled from rates that banks pay each other for loans, is used throughout the financial system to set loan rates around the world.
The investigation - which disclosed e-mails in which bankers appeared to promise bottles of champagne to thank each other for help in setting the rates - has added to a storm of anger against the financial industry.
"Done ... for you big boy," read one message sent by a Barclays banker to one of the lender's traders, who had asked him to fix a key lending rate artificially low.
In another message, after Barclays submitted a rate that was lower than the previous day's, an external trader says: "Dude, I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger."
British Finance Minister George Osborne said the e-mail exchanges "read like an epitaph to an age of irresponsibility".
Laws brought in when the opposition Labour party was in power did not give the Financial Services Authority regulator power to impose criminal penalties for manipulating Libor, but the government would look at changing them, he said.
"As part of our review into Libor and the strength of the financial regulatory architecture, we will examine if there are any gaps in the criminal regime inherited by this government and we will take the necessary steps to address that."
Police could still find ways to prosecute. A spokeswoman for the Serious Fraud Office confirmed the squad was in discussions with the Financial Services Authority regulator over the case.
The British Bankers Association, which establishes the parameters for how Libor is set each day, said it was "shocked" by the behaviour that led to Wednesday's fine, and wanted the British government to look at imposing new rules.
The trade body announced a review of Libor in March after concerns spiralled during the credit crisis that banks were low-balling quotes for benchmarks used to price around $350 trillion in contracts ranging from corporate loans to home mortgages.
"The banks which contribute to the Libor rate must meet the necessary obligations to their regulators," the BBA said. "As part of this review we will now be asking the authorities to consider in what manner the Libor setting mechanism should be regulated in the future."
The BBA has coordinated Libor since the 1980s in a process which is not officially regulated. The rates are compiled and distributed for the trade body each day by news and information provider Thomson Reuters, parent company of Reuters.
The figures are designed to reflect rates at which top banks believe they could borrow money from each other in 10 major currencies and for 15 borrowing periods, from overnight loans to 12 months. By manipulating them, banks could make their own balance sheets look better.
HEAD ABOVE THE PARAPET
One industry source familiar with the situation said it could take months for the next culprit to be nailed by regulators in the global rate fixing scandal.
More than 20 other banks are being probed by regulators from London to Japan and Brussels to North America. Barclays stood out for the way it cooperated with regulators, the source said.
"Barclays was extremely cooperative and the majority of these cases come down to not just the complexity but whether a firm is willing to cooperate and how much a firm is willing to cooperate above and beyond their legal requirements," the source said.
The spotlight is now swinging towards the likes of UBS , the Swiss bank which was among the first to suspend a clutch of traders and last July won partial immunity from some prosecutors in return for cooperation.
Others who have already fired, suspended or seen staff leave after internal investigations into attempted Libor manipulation include JPMorgan, Deutsche Bank, RBS and inter-dealer broker ICAP.
"One of the reasons London is a major international financial centre is because of the perceived emphasis on trust and integrity in the London market," said Simon Culhane, the chief executive of the CISI (Chartered Institute for Securities and Investment).
"This scandal can only serve to damage London's reputation."
Opposition Labour leader Ed Miliband - whose party was in power when the attempted manipulation occurred - said criminal prosecutions should follow the investigation.
"People struggling to make ends meet will be outraged and disgusted by the way bankers have been walking off with millions of pounds for rigging the market," he said.