Taxpayer-backed RBS is set to be fined about 150 million pounds ($233 million) for participating in market manipulation offences similar to those engaged in by Barclays, the Times newspaper said.

RBS said it, like many others, is continuing to co-operate with regulators on the ongoing investigation. Any resolution of its case is months away, a person familiar with the matter said.

Britain's banking woes deepened on Friday as the Financial Services Authority said it had settled with four banks -- Barclays, RBS, HSBC and Lloyds -- after finding evidence they mis-sold products to protect small businesses against a rise in interest rates.

Compensation could run into the hundreds of millions of pounds, lawyers have said, although Lloyds said the cost for it would not be material.

The FSA said from 2001 to date, banks sold around 28,000 interest rate protection products to customers, although it did not did not say how much it would cost the banks.

A string of mis-selling cases has rocked the financial services industry for over two decades and banks are already likely to pay upwards of 9 billion pounds ($14 billion) in compensation for mis-selling loan insurance.

The Libor mis-selling scandal is expected to draw in many banks globally, but Diamond has found himself first in the firing line after U.S. and British authorities fined Barclays $450 million on Wednesday for manipulating the London interbank offer rate (Libor).

Prime Minister David Cameron said Diamond - who was running the investment banking arm Barclays Capital when the rigging occurred in 2005-2009 - and other bosses had some "big questions to answer". Britain also called in the fraud squad to investigate possible crimes.

"Politicians have already been baying for blood and calling for the head of Bob Diamond, especially as he was in charge at BarCap at the time," said Stephen Peak, manager of the Henderson UK Alpha and European Absolute Return funds and a shareholder in the bank.

"We feel that the Barclays board will instinctively wish to resist this, as Diamond is clearly the architect and leading light of Barclays, but feel that the pressure may be too great."

DEFIANT

Diamond admitted in an open letter to Britain's Treasury Select Committee late on Thursday that the bank engaged in "inappropriate behavior" to lower submissions.

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 told Morgan Stanley analysts on Thursday he did not intend to stand down.

Diamond, whose fat bonuses have drawn widespread criticism, won few political friends last year when he told a parliamentary committee that it was time for bankers to stop apologizing.

Barclays Chairman Marcus Agius is also coming under pressure to step down over the scandal.

Shares in Barclays slumped 15 percent on Thursday on concern that Barclays will face lawsuits from U.S. investors and that Diamond may go. Shares in RBS and Lloyds also fell sharply.

They rebounded sharply early on Friday. By 0704 GMT Barclays, RBS and Lloyds shares were each up 3-4 percent and HSBC added 2 percent, buoyed by a 3 percent rise by the European bank index after Euro zone leaders agreed emergency action to cut Spain's and Italy's borrowing costs.

The Libor scandal, which disclosed e-mails in which bankers appeared to promise bottles of champagne to each other for help in setting the rates, has fuelled the anger with the financial industry.

Authorities in Europe, North America and Japan are investigating many banks which help to set Libor, and others are expected also to be heavily fined.

The Times cited informed sources as saying RBS accepted that it was guilty of offences similar to those committed by Barclays' traders, though at RBS they were more isolated and less serious.

Thomson Reuters Corp is the British Bankers' Association's official agent for the daily calculation and publishing of Libor. The company said it continues to support the BBA in calculating and distributing Libor rates.

(Reporting by Steve Slater, Huw Jones, Sinead Cruise and Matt Scuffham; Editing by David Stamp, Richard Pullin and Mike Nesbit)

• A Permanent Economic Emergency