Major UK banks face a challenge to refinance more than 300 billion pounds ($448.4 billion) of government-backed funding over the next two to three years, Fitch Ratings said in a report published on Monday.

The credit rating agency says 2010 could see some positive earnings signs within the major UK banking groups' domestic retail and commercial banking divisions.

But it said any recovery was likely to be gradual, very fragile and could prove short-lived if either asset quality or the wholesale funding markets take another turn for the worse.

Lloyds and Royal Bank of Scotland both have big chunks of government-backed funding to replace because they are partly government-owned after being rescued during the crisis.

They will have to start to wean themselves off government-backed funding as this is beginning to wind down.

The Bank of England's Special Liquidity Scheme and the Treasury's Credit Guarantee Scheme, set up during the credit crisis to help the banks fund themselves, expire by 2012/2013.

Clearly it's in the government's interest to wind down these extraordinary schemes, said James Longsdon, managing director in Fitch Ratings' financial institutions group.

But I have to say if there were a relapse in market conditions you would have to expect the government and the Bank of England to be flexible, he said.

It wouldn't be in anyone's interest to stick rigidly to timetables in such circumstances.

Fitch said the Special Liquidity Scheme supports 185 billion pounds of bank funding and the Credit Guarantee Scheme about 134 billion pounds.

Fitch's report -- UK major banks: reasons to be cheerful or false dawn? -- said that the major UK banks had taken advantage of the stronger market appetite to issue non-guaranteed debt during 2009 and 2010.

But the refinancing requirements in the next two to three years are a key challenge and mean that pressure on liability margins will remain high, Fitch said.

Lloyds has 157 billion pounds of government and central bank-supported funding, with the majority of this maturing over the next two years.

The bank has identified a further 140 billion pounds of legacy assets for run-off up to 2014. It has calculated its new issuance needs at 20-25 billion pounds over the next three years, providing asset run off plans go smoothly, Fitch said.

On top of this, Lloyds had around 85 billion pounds of short-term debt at the end of 2009, Fitch said, which will require more frequent refinancing.

Royal Bank of Scotland had used 21.4 billion pounds of central bank funding and 51.5 billion pounds of government-guaranteed funding as of the end of 2009, Fitch said.

Fitch said the group had made progress in lengthening its debt maturity profile, with the amount of debt with maturity of more than a year standing at 50 percent at the end of 2009 from 45 percent at the end of 2008.

However, the amount of short-term funding requiring frequent refinancing is still sizeable, at around 102 billion pounds of Certificates of Deposit and Commercial Paper in issue at end-2009. ($1=.6690 Pound) (Reporting by Jane Merriman; Editing by Sharon Lindores)