The part-nationalized bank, which is 82 percent-owned by the government, is working towards a settlement early in the fourth quarter, two of the sources said.

Lawyers said it is likely to be the next bank to settle among all of those being pursued by regulators, with the government keen to protect the value of its stake by removing uncertainties over the issue.

"They are state-owned, they are under more pressure than most to deal with this," said one London-based lawyer connected to Libor cases.

RBS declined to comment.

"We will stand up and take any punishment that comes our way," Chief Executive Stephen Hester previously told reporters in a briefing following the bank's half-year results on August 3.

More than a dozen banks are under investigation by regulators in the United States, Europe and Asia for suspected rigging of London interbank offered rate, or Libor, and other similar rates which are used to price trillions of dollars worth of financial products.

Reuters reported in July that RBS and Switzerland's UBS were two of the banks that had played a central role in the manipulation of rates. Barclays was the first to settle over the issue, paying record fines totaling 290 million pounds ($461 million) in June following investigations by U.S. and UK authorities.

Three of the bank's leaders, including Chief Executive Bob Diamond, subsequently resigned.

John Mann, a British lawmaker who sits on parliament's finance committee, reckons RBS could be subject to a worse punishment than Barclays.

"That's what I'm hearing. The suggestions being made are that RBS was more chaotic than Barclays, the whole way they were operating and, therefore, whatever was being done, RBS was doing it more crudely," he told Reuters on Friday.

Barclays executives said in July that fines handed out to other banks would "put in perspective" its own punishment, according to an internal memo seen by Reuters.

POSSIBLE BREACHES

The revelation of the extent of RBS's involvement could pile more pressure on Chief Executive Stephen Hester. The bank is also facing punishment over possible breaches of sanctions on Iran and Hester agreed to forego his bonus for the second year running following a computer systems failure in June which caused massive disruption to millions of customers.

Shares in RBS were trading down 2.8 percent at 221.5 pence by 1430 GMT, compared with a 1.3 percent decline in Europe's bank sector. The UK taxpayer is sitting on a loss of 25 billion pounds on its investments in the bank in 2008 and 2009.

Mann called on British finance minister George Osborne to confirm whether or not he had been briefed on the extent of RBS's involvement in Libor fixing.

The Treasury had no comment on Mann's remarks.

RBS confirmed earlier in August it had dismissed staff in relation to the Libor scandal but gave no indication as to whether it might settle soon with investigators.

The bank said it was co-operating with governments and regulators in the United States, Britain and Japan and with competition authorities in Europe, the United States and Canada.

Other Libor settlements are expected to take more time. Many institutions are trying to evaluate the scale of their involvement compared with others, and whether the rate-rigging was an endemic problem or only concerned a small number of individuals, according to sources at two of the banks.

"By now you know if you have a Barclays-size problem or not, and you're trying to figure out how to deal with that," said one person familiar with the settlement negotiations.

The other source said: "This is going to run and run," adding that the bulk of negotiations over Libor settlements was likely to last well into 2013 and even beyond.

A group settlement is one option banks had looked at. But this would mean lumping together banks which offended to different degrees, and those that did not have an endemic problem across the firm are unlikely to want to do so, the sources said.

RBS and UBS traders are a focus of the global investigation because of their alleged involvement in seeking to influence yen-denominated rates. A former RBS trader based in Singapore alleged this month in a wrongful-dismissal lawsuit that the bank's internal procedure in London seemed to be that "anyone can change Libor.

(Additional reporting by Huw Jones and Aruna Viswanatha in Washington; Editing by David Holmes)

• A Permanent Economic Emergency