By Huw Jones and Andrew MacAskill

LONDON (Reuters) - Britain should negotiate transitional arrangements with the European Union to avoid "cliff edge" disruption to financial markets when the country leaves the bloc, a top British banking official said on Wednesday.

Once Britain has begun formal talks to withdraw from the EU by triggering Article 50, the country will leave two years later even if no new trade deals have been agreed - unless every EU member state agrees to extend the negotiation period.

Anthony Browne, chief executive of the British Bankers' Association, said lenders were in a wait and see mode now but unless a transition framework is put in place banks would soon have to decide whether to move operations to Europe, as such shifts could take several years to implement.

"We think there should be some form of transitional arrangements," Browne told a House of Lords committee.

Much is at stake both for London and government coffers. Financial services generate more than 60 billion pounds ($80 billion) a year in tax, with 15 billion of that from foreign banks in London who depend on an EU passport to sell financial services across the region, Browne said.

But Britain's shock vote to leave the bloc has forced firms to rethink their strategy, which has depended until now on the EU passport. Banks are already making contingency plans on how to serve customers across Europe if Britain loses those rights.

"What we would like ... is to have as full bilateral access to the European market as close as possible to what we have at the moment," Browne said.

Elsewhere in the sector, the Lloyd's of London insurance market said this week it would transfer some business to the EU if Britain does not get single market access.

CLEAR STEER

More generally, the financial sector wants a clear steer from government on its negotiating position after British Prime Minister Theresa May shot down some policy ideas put forward by colleagues who had campaigned to leave the EU.

First, she rejected an Australian-style points system for selecting immigrants, which had been championed ahead of the vote. The financial sector hires large numbers of EU citizens.

Then on Tuesday, May's office distanced itself from comments by David Davis, the minister charged with negotiating Brexit, suggesting Britain was unlikely to keep full access to the EU single market, saying that was his personal opinion.

EU leaders have insisted they would only grant Britain full access in return for the continued free flow of EU citizens to the country.

Charlie Bean, a former deputy governor of the Bank of England, said he expected euro zone policymakers to mandate that clearing in euro-denominated financial transactions, which is dominated by the City of London, is shifted to the euro zone.

"I think it's certain that we will lose it," Bean said.

Top British bankers met with finance minister Philip Hammond on Wednesday to ask for a clearer idea of what the country's divorce from the EU will mean.

"It is important Britain maintains its status as a great place for financial services and that is why the government stands ready to help the sector maximize the opportunities that leaving the EU presents," Hammond said after the meeting.

EQUIVALENT DOUBTS

Some analysts have said there could be a quick fix thanks to the so-called equivalence regime, under which the European Union can allow access to its markets for countries whose regulations are similar to those within the bloc.

But Browne said this was an untested regime and did not provide sufficient certainty for longer-term security.

"The downside of the equivalence regime is that it can be withdrawn at very short notice unilaterally. That is not a good basis for planning for business," Browne said.

In practice, proving and maintaining "equivalence" generally for UK regulations would be challenging because Britain would be sidelined from European rule making.

Bean said a transition period would mean that banks do not have to worry about starting to move to Europe now, before they know what the final trading terms will look like.

Japan, whose banks in London use an EU passport, has also called for transitional arrangements.

"Article 50 is an unrealistic time frame for financial institutions to migrate to a future plan," said Andy Gray, UK financial services leader at consultants PwC.

(Editing by David Clarke)