Lloyds Banking Group, the part state-owned lender which has been hit by its chief executive's sick leave, posted a third-quarter loss and said it may miss financial targets due to the economic turmoil.

Lloyds, 40 percent owned by the government after being bailed out during the 2008 credit crisis, slumped to a loss of 607 million pounds in the three months to September, adding to an interim loss of 3.25 billion.

Its earnings were hit by lower banking margins and higher funding costs and Lloyds said it may not meet some of its medium-term income targets until after 2014. However, it maintained its full-year guidance on margins and for a reduction in losses on loans that have turned sour.

Lloyds shocked investors last week by announcing 47-year-old Chief Executive Antonio Horta-Osorio was taking a break due to stress-related illness, leaving a potential power vacuum at the top of Britain's biggest retail bank.

Tim Tookey, the finance director who is due to leave the bank in February for insurer Resolution, is serving as interim CEO, adding to worries that a major executive shake-up by Horta-Osorio has left Lloyds thin at the top at a time when it faces several headwinds.

Tookey said Horta-Osorio was still expected back before Christmas.

It's very much business as usual. Nothing has stopped. The delivery of all our strategic initiatives continues... there's nothing that's being stopped or paused while we go through these few weeks before we expect Antonio to return, Tookey told reporters on a conference call.

Lloyds shares -- which fell 3 percent on Monday and have slumped nearly 60 percent over the last year -- rebounded by 8.4 percent to 30 pence in mid-morning trade, as its margin outlook reassured analysts and investors.

Lloyds shares remain well below the 63 pence level at which the taxpayer acquired its stake in the bank.

However, Cavendish Asset Management fund manager Paul Mumford said he had taken advantage of the stock's recent slump in the wake of Horta-Osorio's illness to buy up 2 million Lloyds shares at 28.50 pence on November 7.

One's hoping that Horta-Osorio will come back, although there must be some question marks over whether he will be replaced or not, he said.

Lloyds is a high-risk stock, but it's a very good recovery stock as well, he added.

LOT OF CAUTION

Lloyds' loss was worse than a 1.2 billion pound third-quarter net profit at part-nationalised rival Royal Bank of Scotland and profits of 2.4 billion at Barclays.

All banks around the world have been hit by Europe's sovereign debt crisis, with France's Societe Generale on Tuesday announcing a slump in profits, and Tookey said Lloyds was closely monitoring the economic turmoil in the eurozone, with fears growing over Italy following Greece's economic slump.

We're watching the general eurozone situation with a lot of caution, he said.

Lloyds cut its exposure to Italian banks by a third to 1.2 billion pounds in the third-quarter. It also trimmed its exposure to banks in Spain, Portugal and Ireland.

Its exposure to banks and asset-backed securities in Belgium, Greece, Ireland, Italy, Portugal and Spain was 5.3 billion at the end of September, against 6.2 billion at the end of June. It had barely any sovereign debt of those countries.

Lloyds reiterated it hoped to make a decision over 632 retail branches which regulators have ordered it to dispose of by the end of the year, in a deal which Lloyds has code-named Project Verde.

Lloyds plans to sell the branches, attracting interest from new bank venture NBNK and Co-Op Financial Services who have said they will bid, but Lloyds could also list them or spin them off if offers are too low.

Britain ended up with its Lloyds stake and a holding of 83 percent in RBS after rescuing both in 2008 with state bailouts, and in return European regulators ordered RBS and Lloyds to sell off a string of assets.

Lloyds was saddled with billions of pounds of losses after buying troubled rival HBOS at the height of the 2008 crisis, in a deal that was brokered by the Labour government of the time.

(Editing by David Holmes and Mike Nesbit)