Barclays said it notified Britain's tax office about its plan to buy back its own bonds, on which it and other banks have made hefty profits in recent years.

Tax avoidance is legal, but the Treasury said on Monday the scheme and another one were "highly abusive."

The Treasury's estimate that it will ensure the payment of 500 million pounds refers to tax collected from all banks, a person familiar with the matter said. Reuters on Monday estimated Barclays could have to pay about 120 million pounds.

Britain is willing to shut down more bank tax loopholes schemes, Treasury official David Gauke said on Tuesday.

"We are willing to act because in these particular circumstances the behavior is not acceptable and we are prepared to step in," Gauke told BBC Radio 4.

Barclays and other banks have signed up to the Banking Code of Practice on Taxation, which contains a commitment not to engage in tax avoidance.

Gauke said Barclays' scheme had broken that code and that was unacceptable.

"All the banks have signed a code of conduct, they have said that they wouldn't be engaging in aggressive, artificial tax avoidance arrangements of the sort that we have seen, that's been disclosed to the HMRC, and in those circumstances, when we were aware of what this bank was doing, it is right that we took strong action," he added.

Barclays shares were down 0.8 percent at 242 pence by 0932 GMT, underperforming a slightly higher European bank index.

More damaging than the financial hit could be the reputational damage.

Barclays boss Bob Diamond in November said banks must accept responsibility for past mistakes and show how they can contribute to society and economic growth to improve their standing with the public.

"I suspect the bank in question is regretting what it has done. It's not going to do them any reputational good and they've not made any money out of it," Gauke said.

"In some cases there will be difficult explanations they have (to make) to some of their customers to explain why something they said which would benefit them is not going to benefit them," he added.

(Reporting by Steve Slater and Sudip Kar-Gupta)

• A Permanent Economic Emergency